Question

Tanner-UNF Corporation acquired as a long-term investment $170 million of 6% bonds, dated July 1, on July 1, 2013. Company management has the positive intent and ability to hold the bonds until maturity, but when the bonds were acquired Tanner-UNF decided to elect the fair value option for accounting for its investment. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $140 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, 2013, was $150 million.
Required:

1. How would this investment be classified on Tanner-UNF's balance sheet? Significant-influence investments Other securities Available-for-sale securities Trading securities Held-to-maturity securities.

2. Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2013. (If no entry is required for a particular event, select "No journal entry required" in the first account field. Enter your answers in millions, (i.e., 10,000,000 should be entered as 10).)

3. Prepare the journal entry used by Tanner-UNF to record interest on December 31, 2013, at the effective (market) rate. (If no entry is required for an event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

4. Prepare any journal entry necessary to recognize fair value changes as of December 31, 2013. (If no entry is required for an event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

5. At what amount will Tanner-UNF report its investment in the December 31, 2013, balance sheet? (Do not round your intermediate calculations. Enter your answer in millions.)

6. Prepare the 2014 adjusting journal entry assuming that Tanner-UNF has no other securities in this category. Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2014, for $120 million. (If no entry is required for a particular event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

Answer 1

Answer:

1) The Investment would be classified as Held-to-maturity securities

2) Journal Entries (in millions)

Debit Investment $170 Credit Bank $140 Credit Discount on investment $30

3) Debit Bank $5.1 Debit Discount on investment $0.5 Credit Interest Income $5.6

4) Debit Fair Value loss $20 Credit Investment $20

5) The investment will be reported at the fair value of $150,000

6) Debit Bank $120 Debit Discount on Investment $29.5 Loss on Investment $0.5 Credit Investment $150,000  

Explanation:

Interest = investment * semiannual interest

6%/2 = 3%

8%/2 = 4%

Bank = $170,000,000*3% = $5,100,000

Interest income = $140,000,000*4%= $5,600,000

Fair Value $150

cost        $170

Fair Value Loss = $20