Question

Hillsborough Co. has an available-for-sale investment in the bonds of Schuyler Corp. with a carrying (and fair) value of 70,000. Hillsborough determined that due to poor economic prospects for Schuyler, the bonds have decreased in value to 60,000. It is determined that this loss in value is other than temporary. Prepare the journal entry, if any, to record the reduction in value.

Answer 1

To record a permanent loss on an available-for-sale investment, the company must debit a loss account and credit the Available-for-Sale Investment account for the amount of the loss, in this case, 10,000 units of currency.

Step-by-step explanation:

When a company holds an available-for-sale investment in bonds that experience a diminution in value that is deemed to be other than temporary, an impairment loss must be recognized. In the case of Hillsborough Co., the Schuyler Corp. bonds have declined in fair value from 70,000 to 60,000. Since this loss is considered other than temporary, Hillsborough Co. must write down the investment to reflect the loss.

The journal entry to record the impairment would be as follows:

• Debit a loss account (e.g., Loss on Investment in Bonds) for 10,000
• Credit the Available-for-Sale Investment account for 10,000

This entry transfers the loss from the Available-for-Sale Investment account on the balance sheet to the Loss on Investment in Bonds account in the income statement, which reflects a more accurate picture of the economic reality.