Tanner-UNF Corporation acquired as a long-term investment $300million of 10% bonds, dated July 1, on July 1, 2018. Companymanagement has the positive intent and ability to hold the bondsuntil maturity. The market interest rate (yield) was 7% for bondsof similar risk and maturity. Tanner-UNF paid $364 million for thebonds. The company will receive interest semiannually on June 30and December 31. As a result of changing market conditions, thefair value of the bonds at December 31, 2018, was $375 million.
Required:
1. & 2. Prepare the journal entry to record Tanner-UNF’sinvestment in the bonds on July 1, 2018 and interest on December31, 2018, at the effective (market) rate.
3. At what amount will Tanner-UNF report its investment in theDecember 31, 2018, balance sheet?
4. Suppose Moody’s bond rating agency downgraded the risk ratingof the bonds motivating TannerUNF to sell the investment on January2, 2019, for $360 million. Prepare the journal entry to record thesale.
