Question

Stewart Enterprises has the following investments, all purchased prior to 2018: Bee Company 5% bonds, purchased at face value, with an amortized cost of $4,000,000, and classified as held to maturity. At December 31, 2018, the Bee investment had a fair value of $3,500,000, and Stewart calculated that $240,000 of the fair value decline is a credit loss and $260,000 is a noncredit loss. At December 31, 2019. the Bee investment had a fair value of $3,700,000, and Stewart calculated that $140,000 of the difference between fair value and amortized cost was a credit loss and $160,000 was a noncredit loss, page 708 Oliver Corporation 4% bonds, purchased at face value, with an amortized cost of $2,500,000, classified as a trading security. Because of unrealized losses prior to 2018, the Oliver bonds have a fair value adjustment account with a credit balance of $200,000, such that the carrying value of the Oliver investment is $2,300,000 prior to making any adjusting entries in 2018. At December 31, 2018, the Oliver investment had a fair value of $2.200.000, and Stewart calculated that $120.000 of the difference between amortized cost and fair value is a credit loss and $180,000 is a noncredit loss. At December 31, 2019, the Oliver investment had a fair value of $2,700,000. Jones Inc. 6% bonds, purchased at face value, with an amortized cost of $3,500,000, and classified as an available-for-sale investment. Because of unrealized losses prior to 2018, the Jones bonds have a fair value adjustment account with a credit balance of $400,000, such that the carrying value of the Jones investment is $3,100,000 prior to making any adjusting entries in 2018. At December 31, 2018, the Jones investment had a fair value of $2.700,000, and Stewart calculated that $225,000 of the difference between amortized cost and fair value is a credit loss and $575,000 is a noncredit loss. At December 31, 2019, the Jones investment had a fair value of $2,900,000, and Stewart calculated that $125.000 of the difference between amortized cost and fair value is a credit loss and $475,000 is a noncredit loss. Stewart does not intend to sell any of these investments and does not believe it is more likely than not that it will have to sell any of the bond investments before fair value recovers. Required: Prepare the appropriate adjusting journal entries to account for fair value changes during 2018 and 2019, assuming that each investment is viewed as qualifying as an other-than-temporary (OTT) impairment as of December 31, 2018, and then is accounted for normally during 2019 (with no additional OTT impairment in 2019).

Answer 1

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2018 : Stewart does not plan to sell the Bee investment, and does not believe it is more likely than not that it will have to sell the investment before fair value sllovers, so the portion of the impairment that consists of credit and non-credit losses is relevont - Stewart must recognize the & 240000 of credit losses as an ori impairment in earnings, and the other & 260000 as a reduction of Oct, as follows: * other than temporary impairement loss All Dr $240000 -Is To Discount on bond investment Ale $ 240000 * Oir $260000 impairment loss - OCE Alc. or To Fair value adjustment - Non-credit loss Ale 260000 2010: Stewart ignores the change in Bee's fur Value during 2019, as the Bee investment is accounted for as an HIM investment and fair value changes are not relevant Einless viewed as dit impairements. Chap does not allow recovery of prior oft imparements when fair value increases - over the remaining life of the bonds, Stewart would amortize the bonds as it they had a $240000 discount. adjustment - Non credit loss" in toch over the remaining lite of the bonds by creating that account a & Fair value adjustment anon-credit loss" for a portion. each period, thus gradually decreasing the amount shown in Aock and increasing the carrying amount of the bonds.

oliver Corporation Investment : 2018: Stewart accounts for the diver investment as a trading Security, so oTT impairment accounting is not relevante Stewart simply continues to recognize in earrings any unrealized gains & losses associated with four valve changes. Given that the bonds alseady have a negative to adjustment of 200000 & need a negative afair value adjustment of $300ooD to adeust from amortized unrealin ea losses of $ 100ooo for 2018 - & Net unrealized holding gains glosses - Ils le or $100000 T0 Fair value adjustment Alc 100000 2010: Fair value increased to $ 2700000 during 2019, so Stewart needs to have a positive tair value adjustment af I 200000 on the balance sheet to adjust from amortized cost of $2500DDD to taer value of $ 2700000 - Therefore, Stewart most recognize can onrealized gain of a negative 30oooo to this is not a recovery just normal ongoing investment. a positive of the accounting $200000. Note that OTT impaixement, but for a TS (Trading Secority) & $500000 Fair valve to Net adjustment Alc ir Unreatized holding gains losses – Ils & & 50oooo

Jones, Inc Investment : 2018: Stewart does not plan to sell the Jones investment, and does not believe it is more likely than not that it will have to sell the investment before four value the portion of the impairement that consists of credit is non-credit losser is relevant • Stewart most recognize the $225000 al credit losses as an Of impairment in in earnings earrings and and the the $5756oo as other a reduction of oct , as follows: * other than temporary To Investment importiment loss alc Dr in Jones bonds $225000 $225000 * Net unreatized holding 4.195000 gain 4 losses -OCE Alc. or 545ooo Stewart also most reclassify the unrealized loss out of oct & previously recognized $ 400 000 the fair value adjustment: $ 400 000 TO gains & $480000 Net unrealized holding losses -OCI could net the latter two journal entries Note that together Stewart to be: 3 175000 & Net or unrealized holding gains & losses OCE Alc To Fair value adjustment $17.500

However, Stewart still would need to show on the face of the income statement the total of imparrement of I 800 000 less the & SIT DOO in or vielding a $225.000 reduction in earnings 2019: Stewart continues to treat as AFS Therefore, Stewart would the jones show an investment unrealized to $ 2900000 • Note that OFT impairement, but just an AFS investment. The credit loss is not relevant this not a recovery of the normal ongoing accounting for amount of credit loss is non- to this sobsequent accounting * $200000 Fair value adjustments To Net unrealized Ale Dr fording gain & $ 200 000