Exercise 12-10 Available-for-sale securities [LO12-1, 12-4] Tanner-UNF Corporati

Question

Exercise 12-10 Available-for-sale securities [LO12-1, 12-4] Tanner-UNF Corporation acquired as a long-term investment $240 million of 8% bonds, dated July 1, on July 1, 2018. The market interest rate (yield) was 10% 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 $180 million. Prepare the journal entries necessary to record the sale, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale. Complete this question by entering your answers in the tabs below.

Explanation / Answer

Answer 1 & 2. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1-Jul-18 Investment in Bonds      240.00 Cash      200.00 Discount on Bonds         40.00 (record the purchase of bonds) 31-Dec-18 Cash           9.60 $240 X 8% X 6/12 Discount on Bonds           0.40 Interest Revenue         10.00 $200 X 10% X 6/12 (Record the interest received) Answer 3. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 31-Dec-18 Fair Value Adjustment           9.60 $210 - ($200 + $0.40) Net Unrealized Holding Gains & Losses - I/S           9.60 (record the fair value adjustment) Answer 4. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 2-Jan-19 Cash      190.00 Discount on Bonds         39.60 $40 - $0.40 Loss on Sale of Bonds         10.40 Investment in Bonds      240.00 (Record the sale of Bonds) 2-Jan-19 Net Unrealized Holding Gains & Losses - I/S           9.60    Fair Value Adjustment           9.60

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