Question

Tanner-UNF Corporation acquired as a long-term investment $270 million of 8% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 10% for bonds of similar risk and maturity. Tanner-UNF paid $230 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 $240 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. Prepare any additional journal entry necessary for Tanner-UNF to 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 $220 million. Prepare the journal entries necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale. X Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Reg 1 and 2 Req 3 4 Prepare any additional journal entry necessary for Tanner-UNF to report its investment in the December 31, 2021, balance sheet. (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).) Show less No Date General Journal Debit Credit 1 December 31 Fair value adjustment 9.3 Loss on investment (unrealized, OCI) x 9.3 < Req 1 and 2 Req 4 >

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Answer 1

Part 1 270 Investment in bonds Discount on bond investment Cash 40 230 Cash (270 x 8% 6/12) Discount on bonds Interest revenue (230 ~ 10% < 6/12) 10.8 0.7 11.5 Part 2 Workings: 240 Fair market value Book value Less: Discount (40-0.7) Interest in value 270 (39.3) (230.7) 9.3 9.3 Fair value adjustment Unrealized holding gain -NI 9.3

Part 4: Fair value Book value Decrease in value 220 230.7 (10.7) 20 Unrealized holding loss -NI Fair value adjustment *9.3+10.7=20 20* Cash Fair value adjustment Discount on bond investment Investment in bonds 220 10.7 39.3 270

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