Question

Q1. Calvin Corp. holds Mud Co. bonds as an investment. On 1/1/2017, the bond investment had a fair market value of $5,000 and an amortized cost of $5,000. On 12/31/2017, the SEC reports that Mud has admitted to "fraudulent accounting practices." On that day, the fair value of the bond investment falls to $4,200. The 12/31/2017 event is viewed as and accounted for as an impairment event. On 12/31/2018, the fair market value has recovered to $5,100. A. Assume the investment is classified as HTM. Make all journal entries on 12/31/2017 and 12/31/2018 related to the impairment and subsequent increase in fair value. Date entries and show any calculations and explanations. If no entry is needed on one or both dates, explain why. Your account titles should indicate clearly whether any recognized gains or losses are reported in NI or OCI. Date Accounts Dr CY 12/31/2017 12/31/2018 B. Assume the investment is classified as AFS. The ECL for the bond investment on 12/31/2017 is $700 and the ECL on 12/31/2018 is $300. Make necessary journal entries in good form. Date entries and show any calculations and explanations. If no entry is needed on one or both dates, explain why. Also, your account titles should indicate clearly whether any recognized gains or losses are reported in NI or OCI. Accounts 12/31/2017 12/31/2018

Answer 1

Case A. Investment classified as HTM

12/31/2017 - Investment in Mud Co. Bonds - Dr 5,000

To Bank A/c 5,000

Same Journal Entry will be done on 12/31/2018 as well.

Since the amount is invested as Held for Maturity, hence the short term decline in the value of investment is ignored as the returns are predetermined. And the Held for Maturity securities are recorded at amortized cost. However we will make a disclosure in our Notes to accounts regarding the decline in the value of the same on 12/31/2017 as well as the same disclosure will be made when there is a increase in the value of the same on 12/31/2018

Case B. Investment classified as AFS

Available for sale securities are debt and equity securities that are not expected to be Held for Maturity.  Available for sale securities are reported on the balance sheet at the fair value. But any unrealized gains and losses are not recognized in the income statement but are reported in other comprehensive income as a part of shareholders’ equity.

12/31/2017

Investment in Mud Co. Bonds - Dr 4,200

Other Comprehensive Income - Dr 800

To Bank A/c 5,000

Subsequent increase in the fair value of the investments will be again recognized in the OCI

12/31/2018

Investment in Mud Co.Bonds - Dr 900

To Other Comprehensive Income 900.