Ayayai Corporation has municipal bonds classified as a held-to-maturity at Decem

Question

Ayayai Corporation has municipal bonds classified as a held-to-maturity at December 31, 2017. These bonds have a par value of $876,000, an amortized cost of $876,000, and a fair value of $795,000. The company believes that impairment accounting is now appropriate for these bonds.

Prepare the journal entry to recognize the impairment.

What is the new cost basis of the municipal bonds?

Given that the maturity value of the bonds is $876,000, should Ayayai Corporation amortize the difference between the carrying amount and the maturity value over the life of the bonds?

At December 31, 2018, the fair value of the municipal bonds is $831,000. Prepare the entry (if any) to record this information.

New cost basis of the municipal bonds $

Explanation / Answer

SOLUTION

(A) Loss on Impairment = $876,000 - $795,000 = $81,000

Journal Entry -

(B) The new cost basis is $795,000. GAAP indicates that the difference between the carrying amount and the maturity value should not be recorded. If the bonds are impaired, it is inappropriate to increase the asset back up to its original maturity value.

(C) Unrealized Holding Gain or Loss- Equity = ($831,000 - $795,000) = $36,000

Journal Entry-

Account titles and Explanation Debit ($) Credit ($) Loss on Impairment 81,000 Debt Investment 81,000

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