Exercise 12-1 (Algo) Securities held-to-maturity; bond investment; effective interest, discount; financial statement effects [LO12-1, 12-2]
Tanner-UNF Corporation acquired as a long-term investment $180 million of 7.0% bonds, dated July 1, on July 1, 2024. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 9% for bonds of similar risk and maturity. Tanner-UNF paid $160.0 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, 2024, was $160.0 million.
Required:
- & 2.Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2024 and interest on December 31, 2024, at the effective (market) rate.
- At what amount will Tanner-UNF report its investment in the December 31, 2024, balance sheet?
- Suppose Moody’s bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2025, for $130.0 million. Prepare the journal entry to record the sale.
Exercise 12-4 (Static) FASB codification research [LO12-2]
Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org) and select Basic View for free access.
Required:
- What is the specific eight-digit Codification citation (XXX-XX-XX-X) that describes examples of circumstances under which an investment in debt is available to be sold and therefore should not be classified as held-to-maturity?
Exercise 12-5 (Algo) Trading securities [LO12-1, 12-3]
Tanner-UNF Corporation acquired as an investment $280 million of 6% bonds, dated July 1, on July 1, 2024. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $240 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, 2024, was $250 million.
Required:
- & 2.Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2024 and interest on December 31, 2024, at the effective (market) rate.
- Prepare any additional journal entry necessary for Tanner-UNF to report its investment in the December 31, 2024, balance sheet.
- Suppose Moody’s bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2025, for $230 million. Prepare the journal entries required on the date of sale.
Explanation
($ in millions)
- Cash (3.0% × $280 million) = $8.4
Interest revenue (4.0% × $240) = $9.6
- The amortized cost of the bonds is $280 − ($40 − 1.2) = $241.2. Therefore, to adjust to fair value of $250, Tanner-UNF would need a fair value adjustment of $250 − 241.2 = $8.8.
| Fair Value Adjustment | |
| Balance on 7/1/2024 | $ 0 |
| ± Adjustment needed to update fair value | ?question mark |
| Balance needed on 12/31/2024 ($250 − 241.2) | $ 8.8 |
| Fair-Value Adjustment | |||
| Debit | Credit | ||
| 7/1/2024 | 0 | ||
| Change needed | 8.8 | ||
| 12/31/2024 | 8.8 | ||
- 1) Updating the fair-value adjustment:
Need to move from a fair value adjustment of $8.8 to ($11.2):
| Fair Value Adjustment | |
| Balance on 12/31/2024 | $ 8.8 |
| ± Adjustment needed to update fair value | ?question mark |
| Balance needed on 1/2/2025 ($241.2 − 230) | $ (11.2) |
| Fair-Value Adjustment | |||
| Debit | Credit | ||
| 12/31/2024 | 8.8 | ||
| Change needed | 20.0 | ||
| 1/2/2025 | 11.2 | ||
Explanation
($ in millions)
- Cash (3.0% × $280 million) = $8.4
Interest revenue (4.0% × $240) = $9.6
- The amortized cost of the bonds is $280 − ($40 − 1.2) = $241.2. Therefore, to adjust to fair value of $250, Tanner-UNF would need a fair value adjustment of $250 − 241.2 = $8.8.
| Fair Value Adjustment | |
| Balance on 7/1/2024 | $ 0 |
| ± Adjustment needed to update fair value | ?question mark |
| Balance needed on 12/31/2024 ($250 − 241.2) | $ 8.8 |
| Fair-Value Adjustment | |||
| Debit | Credit | ||
| 7/1/2024 | 0 | ||
| Change needed | 8.8 | ||
| 12/31/2024 | 8.8 | ||
- 1) Updating the fair-value adjustment:
Need to move from a fair value adjustment of $8.8 to ($11.2):
| Fair Value Adjustment | |
| Balance on 12/31/2024 | $ 8.8 |
| ± Adjustment needed to update fair value | ?question mark |
| Balance needed on 1/2/2025 ($241.2 − 230) | $ (11.2) |
| Fair-Value Adjustment | |||
| Debit | Credit | ||
| 12/31/2024 | 8.8 | ||
| Change needed | 20.0 | ||
| 1/2/2025 | 11.2 | ||
Explanation
($ in millions)
- Cash (3.0% × $280 million) = $8.4
Interest revenue (4.0% × $240) = $9.6
- The amortized cost of the bonds is $280 − ($40 − 1.2) = $241.2. Therefore, to adjust to fair value of $250, Tanner-UNF would need a fair value adjustment of $250 − 241.2 = $8.8.
| Fair Value Adjustment | |
| Balance on 7/1/2024 | $ 0 |
| ± Adjustment needed to update fair value | ?question mark |
| Balance needed on 12/31/2024 ($250 − 241.2) | $ 8.8 |
| Fair-Value Adjustment | |||
| Debit | Credit | ||
| 7/1/2024 | 0 | ||
| Change needed | 8.8 | ||
| 12/31/2024 | 8.8 | ||
- 1) Updating the fair-value adjustment:
Need to move from a fair value adjustment of $8.8 to ($11.2):
| Fair Value Adjustment | |
| Balance on 12/31/2024 | $ 8.8 |
| ± Adjustment needed to update fair value | ?question mark |
| Balance needed on 1/2/2025 ($241.2 − 230) | $ (11.2) |
| Fair-Value Adjustment | |||
| Debit | Credit | ||
| 12/31/2024 | 8.8 | ||
| Change needed | 20.0 | ||
| 1/2/2025 | 11.2 | ||
Exercise 12-11 (Algo) Available-for-sale securities; financial statement effects [LO12-1, 12-4]
Mills Corporation acquired as a long-term investment $260 million of 7% bonds, dated July 1, on July 1, 2024. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 5% for bonds of similar risk and maturity. Mills paid $320 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, 2024, was $300 million.
Required:
- & 2.Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2024 and interest on December 31, 2024, at the effective (market) rate.
- At what amount will Mills report its investment in the December 31, 2024, balance sheet?
- Suppose Moody’s bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2025, for $330 million. Prepare the journal entries required on the date of sale.
Exercise 12-20 (Algo) Equity method; purchase; investee income; dividends [LO12-6]
As a long-term investment at the beginning of the 2024 fiscal year, Florists International purchased 30% of Nursery Supplies Incorporated’s 20 million shares for $63 million. The fair value and book value of the shares were the same at that time. During the year, Nursery Supplies earned net income of $40 million and distributed cash dividends of $1.00 per share. At the end of the year, the fair value of the shares is $59 million.
Required:
Prepare the appropriate journal entries from the purchase through the end of the year.
Note: If no entry is required for a transaction/event, select “No journal entry required” in the first account field. Enter your answers in millions, (i.e., 10,000,000 should be entered as 10).
Problem 12-10 (Algo) Investment securities and equity method investments compared [LO12-5, 12-6, 12-7]
On January 4, 2024, Runyan Bakery paid $336 million for 10 million shares of Lavery Labeling Company common stock. The investment represents a 30% interest in the net assets of Lavery and gave Runyan the ability to exercise significant influence over Lavery’s operations. Runyan received dividends of $2.50 per share on December 15, 2024, and Lavery reported net income of $210 million for the year ended December 31, 2024. The market value of Lavery’s common stock at December 31, 2024, was $32 per share. On the purchase date, the book value of Lavery’s identifiable net assets was $860 million and:
- The fair value of Lavery’s depreciable assets, with an average remaining useful life of five years, exceeded their book value by $100 million.
- The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.
Required:
- Prepare all appropriate journal entries related to the investment during 2024, assuming Runyan accounts for this investment by the equity method.
- Prepare the journal entries required by Runyan, assuming that the 10 million shares represent a 10% interest in the net assets of Lavery rather than a 30% interest.