Tanner-UNF Corporation acquired as a long-term investment $250 million of 5% bonds, dated July 1, on July 1, 2013. 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 7% for bonds of similar risk and maturity. Tanner-UNF paid $210 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, 2013, was $220 million.

Required:

1.

How would this investment be classified on Tanner-UNF's balance sheet?

	Trading securities
	Other securities
	Available-for-sale securities
	Significant-influence investments
	Held-to-maturity securities

2.	Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2013. (If no entry is required for a particular 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).)

3.

Prepare the journal entry used by Tanner-UNF to record interest on December 31, 2013, at the effective (market) rate. (If no entry is required for an event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

Journal Entry Worksheet

Record interest on December 31, 2013, at the effective (market) rate.

Event

General Journal

Debit

Credit

1	Cash
	Discount on bond investment
	Interest revenue

+

*Enter debits before credits

4.	Prepare any journal entry necessary to recognize fair value changes as of December 31, 2013. (If no entry is required for an event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

Journal Entry Worksheet

Record the entry to recognize fair value changes as of December 31, 2013.

Event

General Journal

Debit

Credit

1

+

*Enter debits before credits

5.

At what amount will Tanner-UNF report its investment in the December 31, 2013, balance sheet? (Do not round your intermediate calculations. Enter your answer in millions.)

Investment

$

million

6.

Prepare the 2014 adjusting journal entry assuming that Tanner-UNF has no other securities in this category. Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2014, for $200 million. (If no entry is required for a particular event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

1. Record the 2014 sale of bonds.

2. Record the fair value changes as of December 31.

Journal Accounts to choose from for all journal-entry questions are as follows:

No journal entry required

AFS investments

Cash

Cash surrender value of life insurance

Discount on bond investment

Fair value adjustment

Gain on life insurance settlement

Gain on sale of investments

Insurance expense

Interest revenue

Investment in bonds

Investment in common shares

Investment in preferred shares

Investment in U.S. treasury bills

Investment in U.S. treasury bonds

Investment revenue receivable

Loss on sale of investments

Net unrealized holding gains and losses OCI

Net unrealized holding gains and lossesI/S

Other-than-temporary impairment loss I/S

Other-than-temporary impairment loss OCI

Recovery of other-than-temporary impairment loss I/S

Retained earnings