Answer:
the first part of the question is missing, so I looked for a similar one:
Tanner-UNF Corporation acquired as a long-term investment $200 million of 7% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 9% for bonds of similar risk and maturity. Tanner-UNF paid $160 million for the bonds. The company will receive interest semiannually on June 30 and December 31. Company management is holding the bonds in its trading portfolio. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $170 million.
1. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
July 1, investment in UNF bonds
Dr Investment in bonds HTM 200,000,000
Cr Cash 160,000,000
Cr Discount on bonds 40,000,000
December 31, interest revenue from investment in bonds
Dr Cash 7,000,000
Dr Discount on bonds 200,000
Cr Interest revenue 7,200,000
Discount on bonds = ($160,000,000 x 4.5%) - ($200,000,000 x 3.5%) = $7,200,000 - $7,000,000 = $200,000
2. Prepare any additional journal entry necessary for Tanner-UNF to report its investment in the December 31, 2018, balance sheet.
Investment in bonds HTM = $200,000,000 (face value) - $39,800,000 (discount on bonds) = $160,200,000
Changes in the market value of bonds held to maturity are not considered by the company.
4. Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2019, for $310.0 million. Prepare the journal entry to record the sale.
Dr Cash 150,000,000
Dr Dr Discount on bonds 39,800,000
Dr Loss on investment in bonds HTM 10,200,000
Cr Investment in bonds HTM 200,000,000