Question

2 Part 2 Homework i Bloom Corporation purchased $1,000,000 of Taylor Company 5% bonds at their face amount, with the intent and ability to hold the bonds until they matured in 2025, so Bloom classifies its investment as AFS. Unfortunately, a combination of problems at Taylor Company and in the debt securities market caused the fair value of the Taylor investment to decline to $600,000 during 2021 The following are the two alternative scenarios that should be analyzed independent of each other 1. Bloom now believes it is more likely than not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value of the $400,000 decline in fair value, Bloom attributes $250,000 to credit losses, and $150,000 to non credit losses 2 Bloom does not plan to sell the Taylor bonds prior to maturity, and does not believe it is more likely than not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value of the $400,000 decline in fair value, Bloom attributes $250,000 to credit losses, and $150,000 to noncredit losses. Required: 1. Prepare appropriate entry(s) at December 31 2021 and indicate how the scenario will affect the 2021 income statement, OCI, and comprehensive income 2. Prepare appropriate entrys) at December 31, 2021 Assume that, at the end of 2020, Bloom had recorded an unrealized loss of $100,000 on the Taylor investment Complete this question by entering your answers in the tabs below. Rey Required 1 G Required 2 S unt Prepare appropriate entry(s) at December 31, 2021. (If no entry is required for a transaction avent, select "No journal entry requred in the first account red.) View transaction list Journal entry worksheet < Prex of 71 ni ** 2 a 0 M

Answer 1

CR 1 Journalize the transaction in the given scenario Date Particulars 31-12-2021 OTT Impairement loss Discount on bond investment To record impairement loss of investment DR $ 4,00,000.00 $ 4,00,000.00 Effect on net income: Earnings are reduced by 400000 as shown below. Income statement Other than temporary impairement loss $-4,00,000.00 CR 2 Journalize the transaction in the given scenario Date Particulars 31-12-2021 OTT Impairement Loss-1/S Discount on bond investment To record credit losses of impairement loss of investment. DR $ 2,50,000.00 $ 2,50,000.00 $ 1,50,000.00 31-12-2021 OTT impairement loss-Other comprehensive income Fair value adjustment- Non credit losses To record non credit losses of impairement loss of investment $ 1,50,000.00 Effect on nt income: Earnings are reduced by 250000 as shown below Income statement Other than temporary impairement loss Less: Portion recognized in other comprehensive income Other than temporary recognized in earnings $-4,00,000.00 $ 1,50,000.00 $-2,50,000.00