Tanner-UNF Corporation acquired as a long-term investment $300million of 10% bonds, dated July 1, on July 1, 2018. The marketinterest rate (yield) was 7% for bonds of similar risk andmaturity. Tanner-UNF paid $364 million for the bonds. The companywill receive interest semiannually on June 30 and December 31.Company management is holding the bonds in its trading portfolio.As a result of changing market conditions, the fair value of thebonds 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. Prepare any additional journal entry necessary for Tanner-UNFto report its investment in the December 31, 2018, balancesheet.
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 entries to recordthe sale.
