Question

Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2021. Company management has the positive intent and ability to hold the bonds until maturity. 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.1. Record the entry to recognize fair value changes as of December 31, 2021.
2. At what amount will Tanner-UNF report its investment in the December 31, 2021, balance sheet?
3. Record the fair value changes as of December 31.

Answer 1

Answer:

Cash                            7,200,000

Discount on Investment 800,000

            Interest revenue 8,000,000

investment of bonds 240,000,000

discount on bonds      (32,200,000)

The bonds will be reported for a net total of 200,800,000

Explanation:

The company, as it has the intent and ability to hold the bonds until maturity will not recognize gain or losses during the period.

It will just amortize the premiium or discount in the bonds

Value            240,000,000

Purchase at (200,000,000)  

Discount of    40,000,000

December 31th entry:

240,000,000 x 6%/2 = 7,200,000

Market rate:

200,000,000 x 8%/2 = 8,000,000

amortization of 800,000