Question

Bloom Corporation purchased $1,000,000 of Taylor Company 5% bonds at par and classifies their investment as AFS. Unfortunately, a combination of problems at Taylor Company and in the debt market caused the fair value of the Taylor investment to decline to $600,000 during 2018. Consider each of the following as independent situation. Assume that Bloom Corporation used the AFS Credit Loss Model introduced in ASU 2016 -13 and required after 2020. Bloom now believes it is more likely than not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value. Of the $400,000 decline in fair value, Bloom attributes $250,000 to credit losses, and $150,000 to noncredit losses. Bloom does not plan to sell the Taylor bonds prior to maturity, and does not believe it is more likely than not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value. Of the $400,000 decline in fair value, Bloom attributes $250,000 to credit losses, and $150,000 to noncredit losses. Bloom had recorded a temporary unrealized loss (not an OTT impairment) of $100,000 on the Taylor investment. Required: 1. Prepare appropriate entry(s) at December 31, 2018, and for each year indicate how the scenario will affect net income, OCI, and comprehensive income. 2. Prepare appropriate entry(s) at December 31, 2018. Assume that, Bloom Corporation used the AFS Credit Loss Model introduced in ASU 2016-13 and required after 2020

Required 1 GJ

Required 1 Inc Stmt

Required 2

Prepare appropriate entry(s) at December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

No	Event	General Journal	Debit	Credit
1	01	Other-than-temporary impairment loss—NIselected answer correct	400,000selected answer correct	not attempted
		Investment revenueselected answer incorrect	not attempted	400,000selected answer correct

Required 1 GJ

Required 1 Inc Stmt

Required 2

Indicate how the scenario will affect the 2018 income statement, OCI, and comprehensive income. (Amounts to be deducted should be indicated with a minus sign.)

	Scenario 1 Effect Scenario 2 effect Other Comprehensive Income Net effect on comprehensive income.

Required 2

Prepare appropriate entry(s) at December 31, 2018. Assume that, Bloom Corporation used the AFS Credit Loss Model introduced in ASU 2016-13 and required after 2020. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

No	Event	General Journal	Debit	Credit
2	1b	Other-than-temporary impairment loss—NIselected answer incorrect	150,000selected answer incorrect	not attempted
		Fair value adjustment—Noncredit lossselected answer incorrect	not attempted	150,000selected answer incorrect

Answer 1

Required 1

No.	Event	General journal	debit	credit
1	a	Other-than-temporary impairment loss— I/S	400000
		Discount on Bonds Investment		400000
1	b	Other-than-temporary impairment loss—I/S	250000
		Discount on Bonds Investment		250000
1	b	Other-than-temporary impairment loss—OCI	150000
		Fair Value Adjustment		150000
1	c	Net unrealized holding gains and losses - OCI	400000
		Fair value adjustment		400000

Required 2

No.	event	General journal	debit	credit
2.	a	Other-than-temporary impairment loss—I /S	400000
		Discount on Bonds Investment		400000
2.	a	Fair value adjustment	100000
		Net unrealized holding gains and losses - OCI		100000
2	b	Other-than-temporary impairment loss—I/S	250000
		Discount on Bonds Investment		250000
2	b	Other-than-temporary impairment loss— OCI	150000
		Fair value adjustment		150000
2	b	Fair value adjustment	100000
		Net unrealized holding gains or losses - OCI		100000
2	c	Net unrealized holding gains or losses - OCI (400000-100000)	300000
		Fair value adjustment		300000

	Scenario 1 effect	Scenario 2 effect
Other comprehensive income	0	(150000)
Net effect on comprehensive income	400000	(400000)