Question

Wang Corporation purchased $180,000 of Hales Inc. 7% bonds at par with the intent and ability to hold the bonds until they matured in 2022, so Wang classifies its investment as held to maturity. Unfortunately, a combination of problems at Hales and in the debt market caused the fair value of the Hales investment to decline to $143,000 during 2018. Wang views this decline as an other-than-temporary (OTT) impairment. Wang calculates that, of the $37,000 drop in fair value, $15,000 of it relates to credit losses and $22,000 relates to non-credit losses. If Wang accounts for the Hales bonds under IAS No. 39, before-tax net income for 2018 will be reduced by :

A.$22,000

B.$0

C.$37,000

D.$15,000

Answer 1

Solution

A. Current Investments – Current Investments are investments which by their nature are readily realizable and are intended to be held for less than a year from the date when such investment is done.

B. Long-Term Investments – Long-term investments are investments other than the current investments, even though they might be freely marketable.

Long-term investments must always be carried in financial statements at their cost. But, when there’s a decline, apart from temporary, in value the long-term investment, carrying amount is reduced for recognizing such decline.
In view of the above provision, there is a objective evidence that a combination of problems at Hales and in the debt market caused the fair value of the Hales investment to decline to $143,000 during 2018 and Wang views this decline as an other-than-temporary (OTT) impairment. Hence the decline is permanent and investment will be treated as long term.

In the given case,
Wang calculates that, of the $37,000 drop in fair value, $15,000 of it relates to credit losses and $22,000 relates to non-credit losses. If Wang accounts for the Hales bonds under IAS No. 39, before-tax net income for 2018 will be reduced by $37,000 and investment will carried at $143,000.