Question

Komissarov SA has a debt investment in the bonds issued by Keune AG. The bonds were purchased at par for €400,000 and, at the end of 2019, have a remaining life of 3 years with annual interest payments at 10％, paid at the end of each year. This debt investment is classified as held-for-collection. Keune is facing a tough economic environment and informs its investors that it will be unable to make all payments according to the contractual terms. The controller of Komissarov has prepared the following revised expected cash flow forecast for this bond investment. Present value of 1 for annual interest of 10％rate for 3 years is 2.48685, for principal due in 3 years is 0.75132.

Dec 31              Expected Cash Flows

2020                         €35.000

2021                         €35.000

2022                        €385.000

Total cash flows       €455.000 

Instructions

a. Determine the impairment loss for Komissarov at December 31, 2019

b. Prepare the entry to record the impairment loss for Komissarov at December 31,2019

c. On January 15, 2020, Keune receive a major capital infusion from a private equity investor. It informs Komissarov that the bonds now will be paid according to the contractual terms. Briefly describe how Komissarov would account for the bond investment in light of this new information.

Answer 1

(a)

Contractual cash flow

[($400,000 X .10 X 3) + $400,000]......................... $520,000

Expected cash flow ................................................ (455,000)

Cash flow loss ........................................................ $ 65,000

Recorded investment ............................................. $400,000

Less: Present value of $350,000 due in

3 years at 10% ($350,000 X .75131) .......... $262,959

Present value of $35,000 annual interest

for 3 years at 10% ($35,000 X 2.48685) .... 87,040 349,999

Impairment loss ...................................................... $ 50,001

(b)

Loss on Impairment ................................................ 50,001

Debt Investments ............................................ 50,001

(c)

Since Komissarov will now receive the contractual cash flow ($520,000) there is no cash flow loss. Therefore Komissarov must reverse the impairment loss by debiting Debt Investments and crediting Recovery of Impairment Loss.