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Tanner-UNF Corporation acquired as a long-term investment $240 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 $200 million for the bonds. The company will receive interest semiannually on June 30 and December 31. Company management has classified the bonds as available-for-sale investments. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $210 million.

Required:

1. & 2. 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.

3. Prepare any additional journal entry necessary for Tanner-UNF to report its investment in the December 31, 2018, 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, 2019, for $190 million. Prepare the journal entries necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale.

Respuesta :

Answer:

Journal Entry

Explanation:

The Journal entry is shown below:-

1. Bonds investment Dr,                     $240 million

         To discount on bond investment           $40 million

         To cash                                                    $200 million

(Being purchase of investment is recorded)

Working note

Discount = Face value of bonds - Actual amount of bonds

= $240 million - $200 million

= $40 million

2. Cash Dr,                                      $8.4 million

($240 million × 7% × (6 ÷ 12)

Discount on bonds investment     $0.6 million

        To Interest revenue                                $9 million

($200 million × 9% × (6 ÷ 12)

(Being interest on bonds is recorded)

Working note

Amortized discount = $9 million - $8.4 million

= $0.6 million

3. Bonds Investment                        $240 million

Less discount on bonds $40 million

Discount on original      $0.6 million

Discount on amortization                   $39.4 million

Cost of Amortized                                $200.6 million

Working Note:-

Outstanding balance on 1 July = $200 million

Increase in balance = Effective interest - Cash

= $9 million - $8.4 million

= $0.6 million

Outstanding balance on 31 December = Increase in balance + Outstanding balance on 1 July

= $0.6 million + $0.6 million

= $200.6 million

4. Cash Dr,                                    $190 million

Bonds investment discount Dr,    $39.4 million

($40 million - $0.6 million)

Sale of Bonds in loss Dr,               $10.6 million

        To Bonds investment                            $240 million

(Being sale of bonds is recorded)