Homework SourseTannerUNF Corporation acquired as a longterm investment 240
Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018. 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. 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.
Required:
4. Suppose Moody’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, including updating the fair-value adjustment, recording any reclassification adjustment, and recording the sale
Journal entry worksheet
Record the entry for fair-value adjustment, AFS investment.
Record the entry for reclassification adjustment
Record the sale of the investment by Tanner-UNF
Solution
Unrealized holding loss on AFS investments—OCI 20,000,000 Fair value adjustment 20,000,000 Fair value adjustment (account balance) 11,632,000 Reclassification adjustment—OCI 11,632,000 Cash 190,000,000 Loss on AFS investments—NI (to balance) 11,632,000 Discount on bond investment (account balance) 38368000 Investment in Masterwear bonds (account balance) 240,000,000 Cash received Interest revenue Discount amortization Book value 200 7.2 8 0.8 200.8 7.2 8.032 0.832 201.632 January 2 2019 Necessary Fair Value Security Amortized Cost Fair Value Adjustment Balance Bonds $ 201,632,000 $ 190,000,000 $ (11,632,000) Fair Value Adjustment Balance as of 12/31/2018 $ 8,368,000 ± Adjustment needed to update fair value $ (20,000,000) Balance needed as of date of sale $ (11,632,000)
