Question

Bloom Corporation purchased $1,450,000 of Taylor Company 5% bonds, at their face amount, with the intent and ability to hold the bonds until they matured in 2025, so Bloom classifies its investment as AFS. Unfortunately, a combination of problems at Taylor Company and in the debt securities market caused the fair value of the Taylor investment to decline to $960,000 during 2021.

Required:
For each of the following scenarios, prepare appropriate entry(s) at December 31, 2018, and indicate how the scenario will affect the 2018 income statement (ignoring income taxes).

a. Bloom now believes it is more likely than not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value. Of the $490,000 decline in fair value, Bloom attributes $295,000 to credit losses, and $195,000 to noncredit losses.
b. Bloom does not plan to sell the Taylor bonds prior to maturity, and does not believe it is more likely than not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value. Of the $490,000 decline in fair value, Bloom attributes $295,000 to credit losses, and $195,000 to noncredit losses.

Answer 1

a. Dr OTT impairment loss $490,000

Cr Discount on bond investment $490,000

Income statement -$490,000

B.Dr OTT impairment loss $295,000

Cr Discount on bond investment $295,000

Dr OTT impairment loss - other comprehensive income $195,000

Cr Fair value adjustment - non credit losses $195,000

Income statement-$295,000

Step-by-step explanation:

a. Prepare of the appropriate entry(s) at December 31, 2018 and indication for how the scenario will affect the 2018 income statement

31.12.21

Dr OTT impairment loss $490,000

Cr Discount on bond investment $490,000

(To record impairment loss of investment)

Effect on net income : Earnings are reduced by $490,000

INCOME STATEMENT

Other than temporary impairment loss - $490,000

b. Prepare of the appropriate entry(s) at December 31, 2018 and indication for how the scenario will affect the 2018 income statement

31.12.2021

Dr OTT impairment loss $295,000

Cr Discount on bond investment $295,000

(To record credit losses of impairment of investment)

31.12.2021

Dr OTT impairment loss - other comprehensive income $195,000

Cr Fair value adjustment - non credit losses $195,000

(To record non - credit losses of impairment loss of investment)

Effort net income : Earnings are reduced by

INCOME STATEMENT

Other than temporary impairment loss -$490,000

Less : Portion recognized in other comprehensive income $195,000

Other than temporary recognized in earnings -$295,000