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

Answer :

(1)

Date	Particulars	Debit ($)	Credit ($)
31.12.21	OTT impairment loss	550000
	Discount on bond investment		550000
	(To record impairment loss of investment)

Effect on net income : Earnings are reduced by $550,000

Income statement
Other than temporary impairment loss	-550000

(2).

Date	Particular	Debit ($)	Credit ($)
31.12.2021	OTT impairment loss	325000
	Discount on bond investment		325000
	(To record credit losses of impairment of investment)
31.12.2021	OTT impairment loss - other comprehensive income	225000
	Fair value adjustment - non credit losses		225000
	(To record non - credit losses of impairment loss of investment)

Effort net income : Earnings are reduced by

Income statement
Other than temporary impairment loss	-550000
Less : Portion recognized in other comprehensive income	225000
Other than temporary recognized in earnings		-325000