Securities held-to-maturity; bond investment; effective interest
Response to the following problem:
Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2016. 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, 2016 was $210 million.
Required:
1. Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2016.
2. Prepare the journal entry by Tanner-UNF to record interest on December 31, 2016, at the effective (market) rate.
3. At what amount will Tanner-UNF report its investment in the December 31, 2016, 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, 2017, for $190 million. Prepare the journal entry to record the sale.