Nichols Corporation purchased $120,000 of Holly Inc. 5% bonds at par with the in

Question

Nichols Corporation purchased $120,000 of Holly Inc. 5% bonds at par with the intent and ability to hold the bonds until they matured in 2017, so Nichols classifies its investment as held to maturity. Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the Holly investment to decline to $92,000 during 2013. Nichols calculates that, of the $28,000 drop in fair value, $12,000 of it relates to credit losses and $16,000 relates to noncredit losses.

Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols calculates that the bonds have incurred credit losses. Before-tax net income for 2013 will be reduced by:

Nichols Corporation purchased $120,000 of Holly Inc. 5% bonds at par with the intent and ability to hold the bonds until they matured in 2017, so Nichols classifies its investment as held to maturity. Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the Holly investment to decline to $92,000 during 2013. Nichols calculates that, of the $28,000 drop in fair value, $12,000 of it relates to credit losses and $16,000 relates to noncredit losses.

Explanation / Answer

Hi,

Option D (12000) is the correct answer.

Notes:

Before tax net income will be reduced by the drop in fair value relating to the company's credit loss (12000).

Thanks.

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