Question

Tanner-UNF Corporation acquired as a long-term investment $160 million of 5.0% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $130.0 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $140.0 million.

Required:
1. & 2. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate.
3. At what amount will Tanner-UNF report its investment in the December 31, 2021, balance sheet?
4. Suppose Moody’s bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2022, for $110.0 million. Prepare the journal entry to record the sale.

No	Date	General Journal	Debit	Credit
1	July 01, 2021
2	December 31, 2021

At what amount will Tanner-UNF report its investment in the December 31, 2021, balance sheet? (Enter your answer in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

	Investment    million

Suppose Moody’s bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2022, for $110.0 million. Prepare the journal entry to record the sale. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

No	Date	General Journal	Debit	Credit
1	January 02, 2022

Answer 1

Solution 1&2:

Journal Entries - Tanner UNF
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	1-Jul-21	Investment in Bond Dr	$160.00
		To Cash		$130.00
		To Discount on bond investment		$30.00
		(Being investment in bond recorded)
2	31-Dec-21	Cash Dr ($160 * 5% * 6/12)	$4.00
		Discount on bond investment Dr	$1.20
		To Interest revenue ($130*8%*6/12)		$5.20
		(Being revenue recognition for bond interest and discount amortized)

Solution 3:

Tanner-UNF report its investment in the December 31, 2021, balance sheet at amortized cost i.e. = $130 + $1.20 = $131.20 milion

Solution 4:

Journal Entries - Tanner UNF Corportation
Event	Date	Particulars	Debit (In Million)	Credit (In Million)
1	2-Jan-22	Cash Dr	$110.00
		Discount on bond investment Dr	$28.80
		Loss on sale of investment Dr	$21.20
		To Investment in Bond		$160.00
		(To record sale of bonds)