Answer:
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.
July 1, investment in UNF bonds
Dr Investment in bonds HTM 350,000,000
Cr Cash 320,000,000
Cr Discount on bonds 30,000,000
December 31, interest revenue from investment in bonds
Dr Cash 12,250,000
Dr Discount on bonds 550,000
Cr Interest revenue 12,800,000
Discount on bonds = ($320,000,000 x 4%) - ($350,000,000 x 3.5%) = $12,800,000 - $12,250,000 = $550,000
3. At what amount will Tanner-UNF report its investment in the December 31, 2018, balance sheet?
Investment in bonds HTM = $350,000,000 (face value) - $29,450,000 (discount on bonds) = $320,550,000
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 310,000,000
Dr Dr Discount on bonds 29,450,000
Dr Loss on investment in bonds HTM 10,550,000
Cr Investment in bonds HTM 350,000,000
