Question

Tanner-UNF Corporation acquired as a long-term investment $240million of 6% bonds, dated July 1, on July 1, 2018. The marketinterest rate (yield) was 8% for bonds of similar risk and maturity.Tanner-UNF paid $200 million for the bonds. The company willreceive interest semiannually on June 30 and December 31. Companymanagement is holding the bonds in its trading portfolio. As a result ofchanging market conditions, the fair value of the bonds at December31, 2018 was $210 million.Part 1: Prepare the journal entry to record Tanner-UNFâs investment inthe bonds on July 1, 2018.Investment in Bonds 240.0Discount on Bond Investment 40.0Cash 200.0

Answer 1

Answer:

Journal Entry

01 July Debit Investment $240 million Credit Bank $200 million Credit Discount on investment $40 million

31 Dec Debit Bank $7,2 Million Debit Discount on Bond $0.8 million Credit Interest Income $8 million

Debit Fair Value loss on investment $30 million Credit Investment $30 million

Explanation:

Interest is received semiannually

6%/2 = 3%

interest = $240 million * 3% =7,200,000

8%/2 = 4%

Interest market $200 million * 4% =8,000,000

Fair value loss = 240 million - 210 million

                        = 30 million loss because cost is greater than fair value