Question

Bonita Corporation has municipal bonds classified as a held-to-maturity at December 31, 2017. These bonds have a par value of $730,000, an amortized cost of $730,000, and a fair value of $653,000. The company believes that impairment accounting is now appropriate for these bonds.

Prepare the journal entry to recognize the impairment.

What is the new cost basis of the municipal bonds?

Given that the maturity value of the bonds is $730,000, should Bonita Corporation amortize the difference between the carrying amount and the maturity value over the life of the bonds?

At December 31, 2018, the fair value of the municipal bonds is $693,000. Prepare the entry (if any) to record this information

Answer 1

Solution:

Requirement 1: Journal entry to recognize the impairment.

Account Titles and Explanation	Debit	Credit
Loss on impairment [ 730,000 - 653,000]	$            77,000
Debt Impairment		$          77,000
(To record impairment loss)

Requirement 2:

new cost basis of the municipal bonds = $ 653,000

Requirement 3:

It is Inappropriate to increase the bonds up to its original value as per US GAAP.

So, Amortization is Not Required.

Requirement 4:

No Journal Entry Required.

Notes:

1) As the municipal bonds classified as a held-to-maturity.

2) Held to maturity bonds should not be recorded at fair value at year end.