Question

Bloom Corporation purchased $1,750,000 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 $1,200,000 during 2021. The following are the two alternative scenarios that should be analyzed independent of each other.

1. 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 $550,000 decline in fair value, Bloom attributes $325,000 to credit losses, and $225,000 to noncredit losses.
2. 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 $550,000 decline in fair value, Bloom attributes $325,000 to credit losses, and $225,000 to noncredit losses.

Required:
1. Prepare appropriate entry(s) at December 31, 2021 and indicate how the scenario will affect the 2021 income statement, OCI, and comprehensive income.
2. Prepare appropriate entry(s) at December 31, 2021. Assume that, at the end of 2020, Bloom had recorded an unrealized loss of $137,500 on the Taylor investment.

Answer 1

1 Credity ($) Α 1) Date Particular 31-Dec-21 OTT impairment loss-I/S Discount on bond investment |(To record impairment loss of investment) Debit ($) 550000 550000 nm + en #moro Effect on net income: Earnings are reduced by $550,000 Income statement Other than temporary impairment loss -550000

Debit ($) Credit ($) 325000 325000 11 2) 12 Date Particular 13 31-Dec-21 OTT impairment loss-1/S 14 Discount on bond investment 15 (To record credit losses of impairement of investment) 16 31-Dec-21 OTT impairment loss-other comprehensive income 18 Fair value adjustment-non credit losses 19 (To record non-credit losses of impairment loss of investment) 20 225000 225000 21 23 24 Effort on net income: Earnings are reduced by Income statement Other than temporary impairement loss Less: portion recogned in other comprehensive income Other than temporary recognized in earnings -550000 225000 25 26 -325000