E 12-19 Fair value option; held-to-maturity investments
[This is a variation of Exercise 12-1 focusing on the fair value option.]
Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2011. Company management has the positive intent and ability to hold the bonds until maturity, but when the bonds were acquired Tanner-UNF decided to elect the fair value option for accounting for its investment. 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. As a result of changing market conditions, the fair value of the bonds at December 31, 2011, was $210 million.
Required:
1. Would this investment be classified on Tanner-UNF's balance sheet as held-to-maturity securities, trading securities, available-for-sale securities, significant-influence investments, or other? Explain.
2. Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2011.
3. Prepare the journal entries by Tanner-UNF to record interest on December 31, 2011, at the effective (market) rate.
4. Prepare any journal entry necessary to recognize fair value changes as of December 31, 2011.
5. At what amount will Tanner-UNF report its investment in the December 31, 2011, balance sheet? Why?
6. Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2012, for $190 million. Prepare the journal entry to record the sale.
Click here for the solution: Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2011
