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Focus on Trading Securities
Tanner-UNF Corporation acquired as a long-term investment $240
million of 7% bonds, dated July 1, on July 1, 2018. The market
interest rate (yield) was 9% 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.
Company management has classified the bonds as available-for-sale
investments. As a result of changing market conditions, the fair
value of the bonds at December 31, 2018, was $210 million.
1. & 2. Prepare the journal entry to record
Tanner-UNFâ€™s investment in the bonds on July 1, 2018, and interest
on December 31, 2018, at the effective (market) rate.
3. Prepare any additional journal entry necessary
for Tanner-UNF to report its investment in the December 31, 2018,
4. Suppose Moodyâ€™s bond rating agency downgraded
the risk rating of the bonds motivating Tanner-UNF to sell the
investment on January 2, 2019, for $190 million. Prepare the
journal entries necessary to record the sale