Journal entry to record investment & interest & sale, reporting investment.
Tanner-UNF Corporation acquires as long-term investment $240 million of 6% bonds, dated July 1, and July 1, 2009. 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, 2009, was $210 million.
Required:
1.Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2009.
2.Prepare the journal entry by Tanner-UNF to record interest on December 31, 2009, at the effective (market) rate.
3.At what amount will Tanner-UNF report its investment in the December 31, 2009, balance sheet? Why?
4.Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2010, for $190 million. Prepare the journal entry to record the sale.