Chapter 12, Problem 12.18BE

Impairments (AFS Credit Loss Model) (Appendix 12B)

• LO12-4, LO12-8

Answer BE 12-17 under the assumption that LED Corporation used the AFS Credit Loss Model introduced in ASU 2016-13 and required after 2020.

BE 12–17

Available-f or-sale securities and impairment (Appendix 12B)

• LO12-4, LO12-8

LED Corporation owns $1,000,000 of Branch Pharmaceuticals bonds and classifies its investment as securities available-forsale. 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 thinks 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?