Bloom Corporation purchased $1,000,000 of Taylor Company 5% bonds at par with the intent and ability to holdthe bonds until they matured in 2025, so Bloom classifies their investment as HTM. Unfortunately, a combinationof problems at Taylor Company and in the debt market caused the fair value of the Taylor investment to declineto $600,000 during 2018.Required:For each of the following scenarios, prepare appropriate entry(s) at December 31, 2018, and indicate how thescenario will affect the 2018 income statement (ignoring income taxes).1. Bloom now believes it is more likely than not that it will have to sell the Taylor bonds before the bonds havea chance to recover their fair value. Of the $400,000 decline in fair value, Bloom attributes $250,000 to creditlosses, and $150,000 to noncredit losses.2. Bloom does not plan to sell the Taylor bonds prior to maturity, and does not believe it is more likely thannot that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value. Of the$400,000 decline in fair value, Bloom attributes $250,000 to credit losses, and $150,000 to noncredit losses.
Bloom Corporation purchased $1,000,000 of Taylor Company 5% bonds at par with the intent and ability to hold
the bonds until they matured in 2025, so Bloom classifies their investment as HTM. Unfortunately, a combination
of problems at Taylor Company and in the debt market caused the fair value of the Taylor investment to decline
to $600,000 during 2018.
Required:
For each of the following scenarios, prepare appropriate entry(s) at December 31, 2018, and indicate how the
scenario will affect the 2018 income statement (ignoring income taxes).
1. Bloom now believes it is more likely than not that it will have to sell the Taylor bonds before the bonds have
a chance to recover their fair value. Of the $400,000 decline in fair value, Bloom attributes $250,000 to credit
losses, and $150,000 to noncredit losses.
2. Bloom does not plan to sell the Taylor bonds prior to maturity, and does not believe it is more likely than
not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value. Of the
$400,000 decline in fair value, Bloom attributes $250,000 to credit losses, and $150,000 to noncredit losses.
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