68.2k views
2 votes
Tanner-UNF Corporation acquired as an investment $240 million of 6% bonds, dated July 1 , on July 1,2021 . Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $200 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 $210 million. Required: 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.

1 Answer

3 votes

Answer:

To prepare the journal entry for Tanner-UNF Corporation's investment in the bonds on July 1, 2021, and interest on December 31, 2021, at the effective (market) rate, we need to consider the initial purchase and subsequent interest accrual. Here's the journal entry:

1. On July 1, 2021:

Investment in Bonds $240,000,000

Cash (Paid for bonds) $200,000,000

Gain on Investment $40,000,000

Explanation: The company acquired $240 million worth of 6% bonds, dated July 1, 2021. The purchase price was $200 million, resulting in a gain of $40 million (the difference between the purchase price and the face value of the bonds).

2. On December 31, 2021:

Investment Income (Interest Receivable) $9,600,000

Investment in Bonds (Amortization) $30,000,000

Gain on Investment $600,000

Interest Revenue $9,030,000

Explanation: The market interest rate (yield) for bonds of similar risk and maturity was 8%. Since the bonds were purchased at a discount ($200 million for a $240 million face value), the effective (market) rate is used to calculate the interest income. The interest receivable is calculated as follows: $240 million face value * 6% coupon rate * 6/12 months = $7,200,000. However, since the fair value at December 31, 2021, is $210 million (below the initial purchase price of $200 million), the amortization of the discount is required. The amortization is the difference between the interest receivable and the interest income recognized: $9,600,000 - $9,030,000 = $570,000. The gain on investment is the difference between the fair value and the carrying amount at December 31, 2021: $210 million - $200 million = $10 million.

Please note that the entries provided are based on the information given, and it's always a good practice to consult with a professional accountant or financial advisor for specific accounting guidance.

User Crayl
by
8.4k points