Bloom believes it is more likely than not it will have to sell the investment before fair value recovers, so the portion of the impairment that consists of credit and noncredit losses is not relevant. Bloom must recognize the entire OTT impairment in earnings as follows:
Other-than-temporary impairment loss—I/S .... 400,000
Discount on bond investment ... 400,000 In the income statement, the entire $400,000 will be shown as an OTT impairment loss.
Requirement 2
Bloom does not plan to sell the investment, and does not believe it is more likely than not that it will have to sell the investment before fair value recovers, so the portion of the impairment that consists of credit and noncredit losses is relevant. Bloom must recognize the $250,000 of credit losses as an OTT impairment in earnings, and the other $150,000 as a reduction of OCI, as follows:
Other-than-temporary impairment loss—I/S .... 250,000
Discount on bond investment ... 250,000 OTT impairment loss—OCI ... 150,000
Fair value adjustment—Noncredit loss ... 150,000 In the income statement, the entire $400,000 will be shown as an OTT impairment loss, then the amount of noncredit loss is subtracted to leave only the credit loss
Exercise 12–26 (concluded) Requirement 3
Bloom does not plan to sell the investment, and does not believe it is more likely than not that Bloom will have to sell the investment before fair value recovers, but the entire impairment consists of noncredit losses, so Bloom does not record any OTT impairment.
Exercise 12–27
Requirement 1: Assuming Bloom has not previously recorded a $100,000 loss Scenario 1: Bloom believes it is more likely than not it will have to sell the investment before fair value recovers, so the portion of the impairment that consists of credit and noncredit losses is not relevant. Bloom must recognize the entire OTT impairment in earnings. Bloom makes the following entry:
Other-than-temporary impairment loss—I/S .... 400,000
Discount on bond investment ... 400,000 In the income statement, the entire $400,000 will be shown as an OTT impairment loss. There is no effect on OCI, and a $400,000 effect on comprehensive income. Scenario 2: Bloom does not plan to sell the investment, and does not believe it is more likely than not that it will have to sell the investment before fair value recovers, so the portion of the impairment that consists of credit and noncredit losses is relevant. Bloom must recognize the $250,000 of credit losses as an OTT impairment in earnings, and the other $150,000 as a reduction of OCI. Bloom makes the following entry:
Other-than-temporary impairment loss—I/S .... 250,000
Discount on bond investment ... 250,000 Net unrealized holding gains and losses—OCI .. 150,000
Fair value adjustment ... 150,000 In the income statement, the entire $400,000 will be shown as an OTT impairment loss, then the amount of noncredit loss is subtracted to leave only the credit loss
Exercise 12–27 (continued)
Scenario 3: Bloom does not plan to sell the investment, and does not believe it is more likely than not that it will have to sell the investment before fair value recovers, but the entire impairment consists of noncredit losses, so Bloom does not record any OTT impairment.
Requirement 2: Assuming Bloom has previously recorded a $100,000 loss
Scenario 1: Bloom believes it is more likely than not it will have to sell the investment before fair value recovers, so the portion of the impairment that consists of credit and noncredit losses is not relevant. Bloom must recognize the entire OTT impairment in earnings. Bloom makes the following entry:
Other-than-temporary impairment loss—I/S ... 400,000
Discount on bond investment ... 400,000
Assuming a previously recorded $100,000 unrealized loss, Bloom must also reclassify that loss out of OCI and the fair value adjustment. In 2012 Bloom would have made the following entry:
Net unrealized holding gains and losses—OCI . 100,000
Fair value adjustment ... 100,000 So to reclassify that unrealized loss, Bloom would reverse that entry.
Fair value adjustment ... 100,000
Net unrealized holding gains and losses—OCI 100,000 In the income statement, the entire $400,000 will be shown as an OTT impairment loss. OCI will be increased by the $100,000 reclassification, such that the net effect on comprehensive income is $300,000.
Exercise 12–27 (concluded)
Scenario 2: Bloom does not plan to sell the investment, and does not believe it is more likely than not that it will have to sell the investment before fair value recovers, so the portion of the impairment that consists of credit and noncredit losses is relevant. Bloom must recognize the $250,000 of credit losses as an OTT impairment in earnings, and the other $150,000 as a reduction of OCI. Bloom makes the following entry:
Other-than-temporary impairment loss ... 250,000
Discount on bond investment ... 250,000 Net unrealized holding gains and losses—OCI .. 150,000
Fair value adjustment ... 150,000
Assuming a previously recorded $100,000 unrealized loss, Bloom must also reclassify that loss out of OCI and the fair value adjustment:
Fair value adjustment ... 100,000
Net unrealized holding gains and losses—OCI 100,000 Note that, when combined with the other journal entries, the net effect is that net income is decreased by $250,000, OCI is decreased by $50,000 ($150,000 – 100,000), and comprehensive income therefore is decreased by $300,000. That makes sense, because $100,000 of decrease in OCI and comprehensive income occurred in 2012, when the $100,000 unrealized loss was recognized.
Scenario 3: Bloom does not plan to sell the investment, and does not believe it is more likely than not that it will have to sell the investment before fair value recovers, but the entire impairment consists of noncredit losses, so Bloom does not record any OTT impairment.