Question

Hagar Corporation has municipal bonds classified as a held-to-maturity at December 31, 2017. These bonds have a par value of $800,000, an amortized cost of $800,000, and a fair value of $720,000. The company believes that impairment accounting is now appropriate for these bonds.

Required:
Prepare the journal entry to recognize the impairment.

Answer 1

Explanation:

The journal entries are as follows

On December 31,2017

Loss on impairment Dr $80,000

        To Debt investment - available for sale $80,000

(Being the loss on impairment is recorded)

It is computed below:

= $800,000 - $720,000

= $80,000

On December 31, 2017

Fair value adjustment- available for sale Dr $80,000

                To Unrealized holding gain or loss - equity $80,000

(Being the fair value adjustment is recorded)

Answer 2

Answer:

Dr Allowance for Doubtful Accounts         $80,000

     Cr Debt Investments                                               80,000

Explanation:

Impairment = Cost - Fair Value = 800,000 - 720,000 = 80,000

Companies should use the CECL model to record the impairment of debt investments similar to receivables.

In evaluating the securities, Hagar now determines that it is probable that it will not collect all amounts due. In this case, it records a debit to allowance for doubtful accounts. Hagar includes this amount in income and records the impairment as shown above.