Question

Stewart Enterprises has the following investments, all purchased prior to 2021: 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: For each investment, Prepare the appropriate adjusting journal entries to account for each investment for 2021 and 2022. 1. Bee Company 6% bonds, purchased at face value, with an amortized cost of $4,360,000, and classified as held to maturity. At December 31, 2021, the Bee investment had a fair value of $3,590,000, and Stewart calculated that $420,000 of the fair value decline is a credit loss and $350,000 is a noncredit loss. At December 31, 2022, the Bee investment had a fair value of $3,790,000, and Stewart calculated that $230,000 of the difference between fair value and amortized cost was a credit loss and $340,000 was a noncredit loss. 2. Oliver Corporation 5% bonds, purchased at face value, with an amortized cost of $2,770,000, classified as a trading security. Because of unrealized losses prior to 2021, the Oliver bonds have a fair value adjustment account with a credit balance of $290,000, such that the carrying value of the Oliver investment is $2,480,000 prior to making any adjusting entries in 2021. At December 31, 2021, the Oliver investment had a fair value of $2,290,000, and Stewart calculated that $210,000 of the difference between amortized cost and fair value is a credit loss and $270,000 is a noncredit loss. At December 31, 2022, the Oliver investment had a fair value of $3,060,000. 3. Jones Inc. 7% bonds, purchased at face value, with an amortized cost of $3,770,000, and classified as an available-for-sale investment. Because of unrealized losses prior to 2021, the Jones bonds have a fair value adjustment account with a credit balance of $490,000, such that the carrying value of the Jones investment is $3,280,000 prior to making any adjusting entries in 2021. At December 31, 2021, the Jones investment had a fair value of $2,790,000, and Stewart calculated that $270,000 of the difference between amortized cost and fair value is a credit loss and $710,000 is a noncredit loss. At December 31, 2022, the Jones investment had a fair value of $3,055,000, and Stewart calculated that $170,000 of the difference between amortized cost and fair value is a credit loss and $545,000 is a noncredit loss.

Answer 1

According to the requirement of the question, we have to record the adjusting Journal entries to account for each investment for 2021 and 2022.

Solution for Requirement 1.

No.	Date	Accounts Titles and Explanation	Debit ($)	Credit ($)
1..	Dec. 31, 2021	Other-than-temporary impairment Loss -I/S	$420,000
		Discount on Bond investment		$420,000
2.	Dec. 31 , 2021	Other-than-temporary impairment Loss-OCI	$350,000
		Fair Value adjustment - Non credit Loss		$350,000
3.	Dec. 31, 2021	No Journal entry required
4.	Dec. 31, 2022	No Journal entry required

Solution for Requirement 2:-

No.	Date	Accounts Titles and Explanation	Debit ($)	Credit ($)
1.	Dec. 31, 2021	No Journal entry required
2.	Dec. 31, 2021	No Journal entry required
3.	Dec. 31, 2021	Net Unrealized holding gains and losses -I/S	$190,000
		Fair Value Adjustment		$190,000
		($2,480,000 - $2.290,000)
4.	Dec. 31, 2022	Fair Value Adjustment	$770,000
		Net Unrealized holding gains and losses - I/S		$770,000
		($3,060,000 - $2,290,000)

Solution for Requirement 3:-

No.	Date	Accounts Titles and Explanation	Debit ($)	Credit ($)
1.	Dec.31, 2021	Other-than-temporary impairment loss - I/S	$270,000
		Discount on bond Investment		$270,000
2.	Dec.31, 2021	Net Unrealized holding gains and losses-OCI	$710,000
		Fair Value Adjustment		$710,000
3.	Dec.31, 2021	Fair Value Adjustment	$490,000
		Net Unrealized holding gains and losses-OCI		$490,000
4.	Dec.31,2022	Fair Value Adjustment	$265,000
		Net Unrealized holding gains and losses- OCI		$265,000
		($3,055,000 - $2,790,000)

Thank you..