Question

Komissarov Company has a debt investments in the bonds issued by Keune Inc. The bonds were purchased at par

for \(400,000 and, at the end of 2017, 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 economical environment and informs all of its investors that it will be unable to make all payments according to the contractul terms. The controller of Komissarov has prepared the following revised expected cash flow forecast for this bond investment.

December 31, Expected cash flows

2018 \)35,000

2019 35,000

2020 385,000

Total cash flows $455,000

Instructions

(a) Determine the impairement loss for Komissarov at December31, 2017.

(b) Prepare the entry to record the impairement loss for Komissarov at Decembber 31, 2017.

(c) On January 15, 2018, Keune receives a major capiatl infusion from a private equity investor. It informs Komissarov that the bonds now will be paid according to the contractual terms. Briefly describe how the Komissarov would account for the bond investment in light of this new information.

Short answer

Impairment loss is $37,474. Loss on Impairment debited and debt investment credited by $34,474.

Step-by-step solution

Calculation of impairement loss

Date	Contractual Cash flow	Expected Cash flow	Loss of cash flow
2018	$40,000	$35,000	$5,000
2019	$40,000	$35,000	$5,000
2020	$400,000	$385,000	$15,000
Total	$480,000	$455,000	$25,000

Recorded Investment	$400,000
Less:
Present value $400,000 due in three years at 10%	($300,526)
Present value of $25,000 interest receivable annually for three yeras at 10%	($62,000)
Amount of impairement loss	$37,474

Journal entry for impairement loss

Date	Particular	Debit	Credit
December 31, 2017	Loss on Impairement	$37,474
	Debt Investment		$37,474
	(Being entry for impairement loss)

Reversal of impairement loss

In this, we reverse the impairement of loss by passing an entry. We debit the investment account and credit the impairement loss account in the entry.

Date	Particulars	Debit	Credit
January 15, 2018	Debt Investment	$37,474
	Loss on Impairement		$37,474
	(Being entry for reversal of impairement loss)