Question

Blue Company in its first year of operations provides the following information related to one of its available-for-sale debt securities at December 31, 2020. Amortized cost $51,700 Fair value 43,400 Expected credit losses 12,900

What is the amount of the credit loss that Blue should report on this available-for-sale security at December 31, 2020?

Prepare the journal entry to record the credit loss, if any (and any other adjustment needed), at December 31, 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Assume the same information as for part (c). Prepare the journal entry to record the credit loss, if necessary (and any other adjustment needed), at December 31, 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

Solution

Blue Company

1. Determination of the amount of the credit loss to be reported on the available-for-sale security at December 31, 2020:

Available for sale securities are reported at fair value.

According to the US GAAP, the amount of credit loss is limited to the amount by which the amortized cost of the security exceeds the fair value.

Credit loss = fair value – amortized cost

Fair value = $43,400

Amortized cost = $51,700

Credit loss = $8,300

Amount of credit loss is limited to $8,300 at December 31, 2020

Journal Entry –

Date	Account Titles and Explanation	Debit	Credit
31-Dec-20	Unrealized Loss on Available for Sale Securities	$8,300
	Available for Sale Securities		$8,300
	(To record unrealized loss on available for sale securities)

The entry to record non-credit loss portion of the unrealized loss, which equals = expected credit loss – unrealized loss on AFS

= 12,900 – 8,300 = $4,600

Date	Account Titles and Explanation	Debit	Credit
31-Dec-20	Unrealized Loss on Available for Sale Securities	$8,300
	Available for Sale Securities		$8,300
	(To record unrealized loss on available for sale securities)
Date	Account Titles and Explanation	Debit	Credit
31-Dec-20	Credit Loss on AFS Debt	$8,300
	Allowance for Credit Losses		$8,300
	Other Comprehensive Income	$4,600
	Available for Sale Security Debt		$4,600
	(To record the non-credit portion of total unrealized loss)