Bloom Corporation purchased $1,850,000 of Taylor Company 5% bonds, at their face amount, with the intent and ability to hold the bonds until they matured in 2025, so Bloom classifies its investment as HTM. 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 $1,280,000 during 2021. 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 $570,000 decline in fair value, Bloom attributes $335,000 to credit losses, and $235,000 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 $570,000 decline in fair value, Bloom attributes $335,000 to credit losses, and $235,000 to noncredit losses. Required:Prepare appropriate entry(s) at December 31, 2021, and indicate how the scenario will affect the 2021 income statement (ignoring income taxes).

Loss on bonds arrives when the redemption value or in this case market value is less than the…

Answered: Bloom Corporation purchased $1,850,000…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Bloom Corporation purchased $1,850,000 of Taylor Company 5% bonds, at their face amount, with the intent and ability to hold the bonds until they matured in 2025, so Bloom classifies its investment as HTM. 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 $1,280,000 during 2021. 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 $570,000 decline in fair value, Bloom attributes $335,000 to credit losses, and $235,000 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 $570,000 decline in fair value, Bloom attributes $335,000 to credit losses, and $235,000 to noncredit losses.

Required:
Prepare appropriate entry(s) at December 31, 2021, and indicate how the scenario will affect the 2021 income statement (ignoring income taxes).

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