Question

Nichols Corporation purchased $100,000 of Holly Inc. 6% bonds at par with the intent and ability to hold the bonds until they matured in 2017, so Nichols classifies its investment as held to maturity. Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the Holly investment to decline to $70,000 during 2013. Nichols calculates that, of the $30,000 drop in fair value, $10,000 of it relates to credit losses and $20,000 relates to noncredit losses.

Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired becasue Nichols in planning to sell the bonds in the near future. Before-tac net income for 2013 will be reduced by:

Answer 1

The before-tax net income for 2013 will be reduced by $10,000 when the Holly Inc. bonds are classified as other-than-temporarily impaired due to credit losses.

Step-by-step explanation:

The before-tax net income for 2013 will be reduced by $10,000 when Nichols Corporation categorizes the Holly Inc. bonds as other-than-temporarily impaired. This amount represents the credit losses related to the decline in fair value of the investment. However, the noncredit losses will not impact the before-tax net income for 2013.