Bloom Corporation purchased $1,750,000 of Taylor Company 5% bonds, at their face amount, with neither the intent nor the ability to hold the bonds until they matured in 2028, so Bloom classifies its investment as AFS. Unfortunately, a combination of problems at Taylor Company and in the debt securities market caused the fair value of the Taylor investment to decline to $1,200,000 during 2024. The following are the two alternative scenarios that should be analyzed independent of each other.
Bloom Corporation purchased $1,750,000 of Taylor Company 5% bonds, at their face amount, with neither the intent nor the ability to hold the bonds until they matured in 2028, so Bloom classifies its investment as AFS. Unfortunately, a combination of problems at Taylor Company and in the debt securities market caused the fair value of the Taylor investment to decline to $1,200,000 during 2024. The following are the two alternative scenarios that should be analyzed independent of each other.
- 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 $550,000 decline in fair value, Bloom attributes $325,000 to credit losses, and $225,000 to noncredit losses.
- 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 $550,000 decline in fair value, Bloom attributes $325,000 to credit losses, and $225,000 to noncredit losses.
Required:
1-a. Prepare appropriate entry(s) at December 31, 2024
1-b. Indicate how the scenario will affect the 2024 income statement, OCI, and comprehensive income.
2. Prepare appropriate entry(s) at December 31, 2024. Assume that, at the end of 2023, Bloom had recorded an unrealized loss of $137,500 on the Taylor investment.
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