Cairo corporation has municipal bonds classified as available for sale at Decemb
ID: 2348549 • Letter: C
Question
Cairo corporation has municipal bonds classified as available for sale at December 31, 2012. These bonds have a par value of $800,000, an amortized cost of $800,000, and a fair value of $740,000. The unrealized loss of $60,000 previously recognized as other comprehensive income and as a separate component of stockholder's equity is now determined to be other than temporary. That is, the company believes that impairment accounting is now appropriate for these bonds. A. Prepare the journal entry to recognize the impairment. B. What is the new cost basis of the municipal bonds? Given that the maturity value of the bonds is $800,000, should Cairo Corporation amortize the difference between the carrying amount and the maturity value over the life of the bonds? C. At December 31, 2013, the fair value of the municipal bonds is $760,000. Prepare the entry (if any) to record the transaction.Explanation / Answer
(a) The entry to record the impairment is as follows: Loss on Impairment ($800,000 – $740,000) Dr 60,000 Available-for-Sale Securities Cr $60,000 In addition, the company needs to adjust its available-for-sale securities to fair value at the end of the period. If the municipal securities are the only available for-sale-securities in its portfolio, the company makes the following entry: Securities Fair Value Adjustment (Available-for-Sale) Dr $60,000 Unrealized Holding Gain or Loss-Equity Cr $60,000 It should be noted that the first entry records the impairment. The second entry is an entry to record fair value for any remaining available- for-sale securities. (b) The new cost basis is $740,000. If the bonds are impaired, it is inappropriate to increase (amortize) the asset back up to its original maturity value. (c) Securities Fair Value Adjustment (Available-for-Sale) Dr $20,000 Unrealized Holding Gain or Loss—Equity ($760,000 – $740,000) Cr 20,000