Tanner-UNF Corporation acquired as a long-term investment $190 million of 8% bonds, dated July 1, on July 1, 2021. 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 10% for bonds of similar risk and maturity. Tanner-UNF paid $160 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 $170 million. Required:
a. Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2021.
b. Prepare the journal entry by Tanner-UNF to record interest on December 31, 2021, at the effective (market) rate.
c. At what amount will Tanner-UNF report its investment in the December 31, 2021, balance sheet? Why?
d. Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2022, for S190 million. Prepare the journal entry to record the sale.

Answer and Explanation:

a. Investment in bonds Dr, $190 million

            To Discount on bond investment $30 million

             To Cash $160 million

(Being purchase of investment is recorded)

b. Cash Dr, ($190 × 8% × 6 ÷ 12) $7.6 million

    Discount on bond investment Dr, $0.4 million

                       To Interest revenue ($160 × 10% × 6 ÷ 12) $8 million

(Being interest on bonds is recorded)

c. The computation of investment in the December is shown below:-

Bond investment   $190 million

Less: discount on bond investment ($30 - $0.4)  -$29.6 million

Amortization cost $160.40 million

As the company reports fair value of $190 million in its balance sheet. Also the timing of selling and purchase the investment is decided by the management as there is a market value, available for sale securities, the market rate of return varies and the short term, as well as the long term securities, are also invested

d. Cash Dr, $190 million

    Discount on Bonds investment Dr, $29.6 million ($30 million - $0.4 million )

    Loss on sale of bonds Dr, $29.6 million

                    To Investment in bonds $190 million

(Being sale of bonds is recorded)