Question

Wang Corporation purchased $190,000 of Hales Inc. 5% bonds at par in 2020 with the intent and ability to hold the bonds until the bonds mature in 2025, so Wang classifies its investment as held-to-maturity. Unfortunately, a combination of problems at Hales and in the debt market caused the fair value of the Hales investment to decline to $159,000 during 2021. Wang applies the CECL model to account for its investment and calculates that, of the $31,000 drop in fair value, $8,000 of it relates to credit losses for amounts not expected to be collected, and the $23,000 remainder relates to noncredit losses. Wang’s accounting for this impairment will reduce before-tax net income for 2021 by:

Answer 1

SInce Wang classified its investments under Held to maturity, the same should be recognized in balance sheet at amortized cost.

However, Given that, Unfortunately, a combination of problems at Hales and in the debt market caused the fair value of the Hales investment to decline to $159,000 during 2021.

Wang applies the CECL model to account for its investment and calculates that, of the $31,000 drop in fair value, $8,000 of it relates to credit losses for amounts not expected to be collected, and the $23,000 remainder relates to noncredit losses.

Therefore investment value is impaired at balance sheet date and

Before-tax net income for 2021 will be reduced by $8,000 related to credit losses.