Bonita Corporation has municipal bonds classified as a held-to-maturity at Decem
ID: 2340276 • Letter: B
Question
Bonita Corporation has municipal bonds classified as a held-to-maturity at December 31, 2017. These bonds have a par value of $824,000, an amortized cost of $824,000, and a fair value of $736,000. The company believes that impairment accounting is now appropriate for these bonds. Prepare the journal entry to recognize the impairment. (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.) Account Titles and Explanation Debit Credit (To record the impairment.) SHOW LIST OF ACCOUNTS LINK TO TEXT What is the new cost basis of the municipal bonds? New cost basis of the municipal bonds $ Given that the maturity value of the bonds is $824,000, should Bonita Corporation amortize the difference between the carrying amount and the maturity value over the life of the bonds? SHOW LIST OF ACCOUNTS LINK TO TEXT At December 31, 2018, the fair value of the municipal bonds is $776,000. Prepare the entry (if any) to record this information. (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.)
Explanation / Answer
1.
88000
2.
The new cost basis is 736000.
According to GAAP the difference between the carrying amount and the maturity value should not be recorded. If the bonds are impaired, it is inappropriate to increase (amortize) the asset back up to its original maturity value.
3.
December 31, 2017 Loss on Impairment 88000 Bond Investments 88000 Fair Value Adjustment (Available-for-Sale) 88000 Unrealized Holding Gain or Loss - Equity88000