Question

LED Corporation owns $1,050,000 of Branch Pharmaceuticals bonds and classifies its investment as securities available-for-sale. The market price of Branch's bonds fell by $500,000, due to concerns about one of the company's principal drugs. The concerns were justified when the FDA banned the drug. $100,000 of that decline in value already had been included in OCI as a temporary unrealized loss in a prior period. LED views $240,000 of the $500,000 loss as related to credit losses, and the other $260,000 as noncredit losses. LED does not plan to sell the investment and does not think it is more likely than not that it will have to sell the investment before fair value recovers. What journal entries should LED record to account for the decline in market value in the current period? How should the decline affect net income and comprehensive income? Complete this question by entering your answers in the tabs below. General Journal Effect What journal entries should LED record to account for the decline in market value in the current period? (If no entry is required for a transaction/event, select "No journal entry required in the first account field.) View transaction list Journal entry worksheet Record the entry for credit losses. Note: Enter debits before credits. Transaction General Journal Debit Credit Record entry Clear entry View general journal

Answer 1

1 ) Other than Temporary Impairment loss DR $500,000.00

Discount on Bond Investment CR $500,000.00

(Being LED record Impairment of $ 500,000)

2) Fair Value Adjustment DR $100,000.00

Net Unrealised holding gains and losses CR $100,000.00

(Being Previously recognised unrealised losses of $ 100,000 reclassified)

In the Income statement, the entire $ 500,000 will be shown as an Other than temporary impairment loss. Also, $100,000 reclassification adjustment will increase OCI.

Therefore , the Net effect on comprehensive oncome during the current period will be $ 400,000.00