Investments AFS Cost Fair Value Unrealized Gain Loss Municipal

Investments afs cost fair value unrealized gain loss

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December 31, 2014Investments (AFS)CostFair ValueUnrealized Gain (Loss)Municipal Bonds- * - Total of portfolio- - - Previous fair value adjustment balance - Cr.- Fair value adjustment - Dr.-
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E17-18 Impairment of Debt SecuritiesHagar Corporation has municipal bonds classified as available-for-sale at December 31, 2013. These bonds have a par valueof $800,000, an amortized cost of $800,000, and a fair value of $720,000. The unrealized loss of $80,000 previously recognizedas other comprehensive income and as a separate component of stockholders' equity is now determined to be other thantemporary. That is, the company believes that impairment accounting is now appropriate for these bonds.Instructions(a) Prepare the journal entry to recognize the impairment.31-Dec-13 Loss on Impairment ($800,000 - $720,000)80,000 Debt Investments (Available-for-Sale)80,000 In addition, the company needs to adjust its available-for-sale securities to fair value at the end of the period. If the municipalsecurities are the only available-for-sale securities in its portfolio the company makes the following entry:31-Dec-13 Fair Value Adjustment (Available-for-Sale)80,000 * Unrealized Holding Gain or Loss - Equity80,000 December 31, 2013Investments (AFS)CostFair ValueUnrealized Gain (Loss)Municipal Bonds720,000 * 720,000 - Total of portfolio720,000 720,000 - Previous fair value adjustment balance - Cr.(80,000)Fair value adjustment - Dr.80,000 **We use the new, adjusted for impairment, cost basis.(b) What is the new cost basis of the municipal bonds? Given that the maturity value of the bonds is $800,000, shouldHagar Corporation amortize the difference between the carrying amount and the maturity value over the life of thebonds?The new cost basis is $720,000. GAAP indicates that 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. (c) At December 31, 2014, the fair value of the municipal bonds is $760,000. Prepare the entry (if any) to record this information.31-Dec-13 Fair Value Adjustment (Available-for-Sale)40,000 Unrealized Holding Gain or Loss - Equity40,000 December 31, 2014Investments (AFS)CostFair ValueUnrealized Gain (Loss)Municipal Bonds720,000 * 760,000 40,000 Total of portfolio720,000 760,000 40,000 Previous fair value adjustment balance - Cr.- Fair value adjustment - Dr.40,000
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