Question

Calvin Corp. holds Crub Co. bonds as an investment Held-to-maturity (HTM). On 1/1/2017, the investment had a fair value of $4,800; and, the investment was properly reported at amortized cost of $5,000. On 12/31/2017, the SEC reports that Crub has admitted to “fraudulent accounting practices and malfeasance.” With the announcement, the bond’s fair value falls to $3,800 and the bond is classified as impaired. What is the impairment loss for 2017?

a.                            200

b.                           1,000

c.                            -0-

d.                           1,200 <---------------------------- ANSWER

e.                           800

Can someone help me with this question please? I know the answer is d) 1,200 but I want an explanation as to WHY? show your work please and thanks in advance!

Answer 1

Investments are considered as impaired when there is no assurance of its future cash flow due to some changes in the policies.Over here the fair market value of asset drops to $ 3,800 due to the firms fraudulent accounting practices and malfeasance. Hence the loss to be calculated will be the difference in Carrying Value of asset, if it was held till maturity and the Value of asset realized if sold in the market or the Fair Market Value (FMV)

Impaired Cost = Recoverable Amount - Carrying Value

Carrying Value is the value of asset displayed in balance sheet, here it i $ 5,000 the amortized cost as reported.

Recoverable Amount . Bonds Fair Value on 12/31/20017 $ 3,800

Impaired Cost = $3,800- $ 5,000 = -1,200 i.e. Impaired loss of $1,200

answered by: anonymous