LED Corporation owns $1,000,000 of Branch Pharmaceuticals bonds and classifies its investment as securities available-for-sale. The market price of Branch’s bonds fell by $450,000 due to concerns about one of the company’s principal drugs. The concerns were justified when the FDA banned the drug. $100,000 of that decline in value already had been included in OCI as a temporary unrealized loss in a prior period. LED views $200,000 of the $450,000 loss as related to credit losses, and the other $250,000 as noncredit losses. LED does not plan to sell the investment and does not think it is more likely than not that it will have to sell the investment before fair value recovers. What journal entries should LED record to account for the decline in market value in the current period? How should the decline affect net income and comprehensive income? What journal entries should LED record to account for the decline in market value in the current period? Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. No Transaction General Journal Debit Credit 1 1 Allowance for credit lossesselected answer incorrect 450,000selected answer incorrect not attempted Loss on investments (unrealized, OCI)selected answer incorrect not attempted 450,000selected answer incorrect Fair value adjustmentselected answer incorrect 200,000selected answer incorrect not attempted Loss on investments (unrealized, OCI)selected answer incorrect not attempted 200,000 How should the decline affect net income and comprehensive income?

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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LED Corporation owns $1,000,000 of Branch Pharmaceuticals bonds and classifies its investment as securities available-for-sale. The market price of Branch’s bonds fell by $450,000 due to concerns about one of the company’s principal drugs. The concerns were justified when the FDA banned the drug. $100,000 of that decline in value already had been included in OCI as a temporary unrealized loss in a prior period. LED views $200,000 of the $450,000 loss as related to credit losses, and the other $250,000 as noncredit losses. LED does not plan to sell the investment and does not think it is more likely than not that it will have to sell the investment before fair value recovers.

What journal entries should LED record to account for the decline in market value in the current period? How should the decline affect net income and comprehensive income?

What journal entries should LED record to account for the decline in market value in the current period?
Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field.

No	Transaction	General Journal	Debit	Credit
1	1	Allowance for credit lossesselected answer incorrect	450,000selected answer incorrect	not attempted
		Loss on investments (unrealized, OCI)selected answer incorrect	not attempted	450,000selected answer incorrect
		Fair value adjustmentselected answer incorrect	200,000selected answer incorrect	not attempted
		Loss on investments (unrealized, OCI)selected answer incorrect	not attempted	200,000

How should the decline affect net income and comprehensive income?
Note: Negative amounts should be entered with minus sign.

	Effect
Net income	$450,000selected answer incorrect
Other comprehensive income	$100,000selected answer incorrect
Net effect on comprehensive income	$350,000

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