Question

Tanner-UNF Corporation acquired as a long-term investment $350 million of 7% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity, but when the bonds were acquired Tanner-UNF decided to elect the fair value option for accounting for its investment. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $320 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 $330 million.

Required:
1. How would this investment be classified on Tanner-UNF's balance sheet?
2. to 4. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2021, interest on December 31, 2021, at the effective (market) and fair value changes as of December 31, 2021.
5. At what amount will Tanner-UNF report its investment in the December 31, 2021, balance sheet?
6. 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 $310 million. Prepare the journal entries to record the sale.

Answer 1

Tanner UNF (in million $) Journal Enteries Date Particulars 1.7.2021 Investment in Bonds a/c Dr. To Discount on Bond Investment To Cash (to record Tanner-UNF's investment inthe bonds) Debit in $ Credit in $ 350 30 320 12.25 0.55 31.12.2021 Cash (3.5% x 350) a/c Dr. Discount on Bonds a/c Dr. To Interest Revenue (4% x 320) (to record interest) 12.8 330 Fair market value Book value Less: Discount (30.0-0.55) Increase in value 350 29.45 320.55 9.45 31.12.2021 Fair value adjustment a/c Dr. To Unrealized holding gain (1/) (to report its investment) 9.45 Fair market value Book value Decrease in value 310 -320.55 -10.55 Dr. Unrealized holding loss (1/s) a/c To Fair value adjustment 20 Fair value adj. 9.45 20 10.55 Cash a/c Dr. Fair value adjustment a/c Dr. Discount on bond investment a/c Dr. To Investment in bonds (to record the sale) 310 10.55 29.45 350