Question

Up ence betwe en (b) Record the journal entry, if any, necessary at Det E17-22 (L04) (Impairment) Elaina Company has the following investments as of December JI, Investments in common stock of Laser Company $1,500,000 Investment in debt securities of FourSquare Company $3,300,000 In both investments, the carrying value and the fair value of these two investments are the same at December stock investments does not result in significant influence on the operations of Laser Company. Elaina's debt in ered held-to-maturity. At December 31, 2018, the shares in Laser Company are valued at $1,100,000; the debt invant ties of FourSquare are valued at $2,500,000. Assume that these investments are considered impaired. December 31, 2017. Elaina's a's debt investment is consid he debt investment securi- Instructions (a) Prepare the journal entries to record the impairment of these two securities at December 31, 2018 (b) Assuming the fair value of the Laser shares is $1,400,000 and the value of its debt investment is $2,950,000, what entries if any, should be recorded in 2019 related to impairment? (c) Prepare the journal entries at December 31, 2018, assuming these securities are not impaired. (Ignore interest revenue entries, (d) Assume that the debt investment in FourSquare Company was available-for-sale and the expected credit loss was $900,000. Prepare the journal entry to record this impairment on December 31, 2018. 900

Answer 1

As Given in the Question Elaina's stock investments does not result in significant influence on the operations of Laser Company, therefore we can assume that the investment is available-for-sale securities.

AFS securities may be debt or equity securities reported at fair market value on the company's balance sheet and compensated for by cost method. Any potential rise or decrease (impairment) in the fair market value of securities is identified in the Other Comprehensive Income (OCI) as an unrealized gain or loss that forms part of the category of balance sheet equity.

The cost of a held to maturity investment during the holding period is not adjusted to the fair value. The reason is that the investor plans to retain ownership until the investment's maturity date, at which stage the investment's face value will be redeemed.

a) The journal entries to record the impairment of these two securities at 31/12/2018 are as follows:

Laser Company

• $1,500,000 - $1,100,000 = $400,000

2018	Particulars	Debit	Credit
Dec 31	Available-for-sale securities		$400,000
	Unrealized loss-Other comprehensive income	$400,000

Four Square Company

No impairment is recorded.

b) Laser Company

• $1,500,000 - $1,400,000 = $100,000

2018	Particulars	Debit	Credit
Dec 31	Available-for-sale securities		$100,000
	Unrealized loss-Other comprehensive income	$100,000

Four Square Company

No impairment is recorded.

c) No journal entries are required at 31/12/2018, since these securities are not impaired.

d) Assume that the debt investment in FourSquare Company was available-for-sale and the expected credit loss was $900,000.

2018	Particulars	Debit	Credit
Dec 31	Available-for-sale securities		$900,000
	Unrealized loss-Other comprehensive income	$900,000