Question :
Exercise 1
Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2013. Company management has the positive ability and intent to hold the bonds until maturity. The market interest rate (yield) was 8% for bonds of similar maturity and risk. Tanner-UNF paid $200 million for the bonds. The company will get interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2013 was $210 million.
Required:
1. Determine the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2013.
2. Determine the journal entry by Tanner-UNF to record interest on December 31, 2013, at the effective (market) rate.
3. At what amount can Tanner-UNF report its investment in the December 31, 2013, balance sheet? Why?
4. Consider Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2014, for $190 million. Write the journal entry to record the sale.
Exercise 2.
Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2013. Company management has the optimistic intent and ability to hold the bonds until maturity. The market interest rate (yield) was 8% for bonds of similar maturity and risk. Tanner-UNF paid $200 million for the bonds. The company may 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, 2013 was $210 million.
Required:
1. Write the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2013.
2. Write the journal entry by Tanner-UNF to record interest on December 31, 2013, at the efficient (market) rate.
3. At what amount can Tanner-UNF report its investment in the December 31, 2013, balance sheet? Why?
4. Consider Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2014, for $190 million. Write the journal entry to record the sale.