Pina Colada Company has an investment in 8%, 12-year bonds of Soto Company. The
ID: 2541669 • Letter: P
Question
Pina Colada Company has an investment in 8%, 12-year bonds of Soto Company. The investment was originally purchased at par for $170 in 2016 and it is accounted for at amortized cost. Early in 2017, Pina Colada recorded an impairment on the Soto investment due to Soto’s financial distress. At that time, the present value of the cash flows discounted using the original effective interest rate was $153, and the present value of the cash flows using the then current market rate was $155. In 2018, Soto returned to profitability and the Soto investment was no longer considered impaired.
Prepare the entries Pina Colada would make in 2017 and 2018 under ASPE. (Credit account titles are automatically indented when the 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.)
Date
Account Titles and Explanation
Debit
Credit
2017________________________________
_____________________________________
2018__________________________________
______________________________________
Date
Account Titles and Explanation
Debit
Credit
Explanation / Answer
As per ASPE, if there is evidence of impairment, reduce the carrying amunt of the asset to the present value of cash flows from asset discounted using a current market rate of interest
So in this case PV using Current Market rate is 155
So Impairment Loss should be $ 15 i.e. 170-155
2017 Net Income Debit 15
Investment Credit 15
2018 Investment Debit 15
Net Income Credit 15