Question

Tanner-UNF Corporation acquired as a long-term investment $260 million of 6.0% 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 9% for bonds of similar risk and maturity. Tanner-UNF paid $220.0 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 $230.0 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 $210.0 million. Prepare the journal entry to record the sale.

Answer 1

1. Dr Investment in bonds $260 million

Cr Discount on bond investment $40 million

Cr Cash $220 million

2. Dr Cash $7.8 million

Dr Discount on bond investment $2.1 million

Cr Interest revenue $9.9million

3. $222.1million

4. Dr Cash $210 million

Dr Discount on Bonds investment $37.9million

Dr Loss on sale of bonds $12.1 million

Cr Investment in bonds $260 million

Step-by-step explanation:

1. & 2. Preparatiin of 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.

1. Dr Investment in bonds $260 million

Cr Discount on bond investment $40 million

Cr Cash $220 million

(Being to record the purchase of investment )

2. Dr Cash $7.8 million

[(6%*$260)* 6 ÷ 12]

Dr Discount on bond investment $2.1 million

($9.9million-$7.8 million)

Cr Interest revenue $9.9million

[(9%*$220)* 6 ÷ 12]

(Being to record interest on bonds )

3. Calculation for what amount will Tanner-UNF report its investment in the December 31, 2021, balance sheet

Bond investment $260 million

Less Discount on bond investment ($37.9million)

($40 million - $2.1 million)

Investment cost $222.1million

Therefore the amount that Tanner-UNF will report its investment in the December 31, 2021, balance sheet is $222.1million

4. Preparation of the journal entry to record the sale.

Dr Cash $210 million

Dr Discount on Bonds investment $37.9million

($40 million - $2.1 million)

Dr Loss on sale of bonds $12.1 million

[260 million-($210 million+$37.9million)]

Cr Investment in bonds $260 million

(Being to record sale of bonds )