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Chapter 13: Q18E (page 658)

(Impairment of Debt Securities) Hagar Corporation has municipal bonds classified as a held-to-maturity at December 31, 2017. These bonds have a par value of \(800,000, an amortized cost of \)800,000, and a fair value of \(720,000. The
The company believes that impairment accounting is now appropriate for these bonds.
Instructions
(a) Prepare the journal entry to recognize the impairment.
(b) What is the new cost basis of the municipal bonds? Given that the maturity value of the bonds is \)800,000, should Hagar
Do corporations amortize the difference between the carrying amount and the maturity value over the life of the bonds?
(c) On December 31, 2018, the fair value of the municipal bonds is $760,000. Prepare the entry (if any) to record this information

Short Answer

Expert verified

Loss on the impairment debited and debt investment credited by $80,000. New cost basis is $720,000. No entry required for municipal bonds.

Step by step solution

01

Journal entry to recognize the impairment

Date	Particulars	Debit	Credit
December 31, 2017	Loss on impairment ($800,000 - $720,000)	$80,000
	Debt Investment		$80,000
	(Loss on the impairment of the bonds)

02

New cost basis

The new cost basis of the bonds is $720,000. In this, the cost of bonds is impaired so according to the GAAP it is not right to record bonds on their original value. Hence, the new cost of bonds is $720,00

03

Step 4:Journal entry for fair value of municipal bonds

In this, no entry of fair value is passed because the given security is a held-to-maturity debt investment.

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Most popular questions from this chapter

Ramirez Company has a held-for-collection investment in the 6%, 20-year bonds of Soto Company. The investment was originally purchased for \(1,200,000 in 2016. Early in 2017, Ramirez recorded an impairment of \)300,000 on the Soto investment, due to Soto’s financial distress. In 2018, Soto returned to profitability and the Soto investment was no longer impaired. What entry does Ramirez make in 2018 under (a) GAAP and (b) IFRS?

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.

(Fair Value and Equity Methods) Brooks Corp. is a medium-sized corporation specializing in quarrying stonefor building construction. The company has long dominated the market, at one time achieving a 70% market penetration. Duringprosperous years, the company’s profits, coupled with a conservative dividend policy, resulted in funds available for outside

investment. Over the years, Brooks has had a policy of investing idle cash in equity securities. In particular, Brooks has made periodicinvestments in the company’s principal supplier, Norton Industries. Although the firm currently owns 12% of the outstandingcommon stock of Norton Industries, Brooks does not have significant influence over the operations of Norton Industries.

Cheryl Thomas has recently joined Brooks as assistant controller, and her first assignment is to prepare the 2017 year-endadjusting entries for the accounts that are valued by the “fair value” rule for financial reporting purposes. Thomas has gatheredthe following information about Brooks’ pertinent accounts.

1. Brooks has equity securities related to Delaney Motors and Patrick Electric. During 2017, Brooks purchased 100,000 shares of

Delaney Motors for \(1,400,000; these shares currently have a fair value of \)1,600,000. Brooks’ investment in Patrick Electrichas not been profitable; the company acquired 50,000 shares of Patrick in April 2017 at \(20 per share, a purchase that currentlyhas a value of \)720,000.

2. Prior to 2017, Brooks invested \(22,500,000 in Norton Industries and has not changed its holdings this year. This investmentin Norton Industries was valued at \)21,500,000 on December 31, 2016. Brooks’ 12% ownership of Norton Industries has acurrent fair value of \(22,225,000 on December 2017.

Instructions

(a) Prepare the appropriate adjusting entries for Brooks as of December 31, 2017, to reflect the application of the “fairvalue” rule for the securities described above.

(b) For the securities presented above, describe how the results of the valuation adjustments made in (a) would be reflectedin the body of Brooks’ 2017 financial statements.

(c) Prepare the entries for the Norton investment, assuming that Brooks owns 25% of Norton’s shares. Norton reportedincome of \)500,000 in 2017 and paid cash dividends of $100,000.

Explain the accounting for an assurance-type warranty.

How are the terms “probable,” “reasonably possible,” and “remote” related to contingent liabilities?

See all solutions

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