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 semi-annually 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 the bonds at December 31, 2018, was $210 million.
1. & 2. Prepare the journal entry to record Tanner-UNF’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, balance sheet.
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 to record the sale.

On December 31, 2018, entries for interest received and fair value recognition are as follows (fair value recognition is necessary because the bond is held in trading portfolio):

Debit: Investment in Bonds Account $10 million (increase in fair value)

Credit: Profit/Loss Account $10 million (increase in fair value)

Debit: Cash/Bank Account $7.2 million (semi-annual interest on bond calculated as follows, 6%*240*0.5 = $7.2 million)

Credit: Profit/Loss Account $7.2 million (semi-annual interest)

On January 2, 2019, sale of bond investment

Debit: Cash/Bank Account $190 million (sales proceed)

Credit: Investment in Bonds Account $190 million (sales proceed)

Debit: Profit/Loss Account $20 million (loss on bond investment, calculated as $210 fair value less $190 million sales proceed)

Credit: Investment in Bonds Account $20 million (loss on bond investment)