Should Teddy Record An Other Than-Temporary Impairment?
Question 1 (45 points):
Should Teddy record an other-than-temporary impairment as of December 31, 20X1, and if so, for what amount on the following investments:
Investment 1: Happy New Year & Co.
Investment 2: Beary Beary.
Investment 3: Buy-A-Lot Company
For each investment clearly answer YES or NO, explain your reasoning, and if YES the amount.
ASC 320-10-35-21 states that impairment occurs when the fair values fall below the original costs. In all three investments, we need to determine if the impairment is other-than-temporary.
ASC 320-10-35-33 states that security shall be deemed temporarily impaired when an entity has decided to sell an impaired available-for-sale security and the entity does not expect the fair value of the security …show more content…
(b) Would the impairment charge as of December 31, 20X1, be different if the stock price at issuance of the financial statements (i.e., as of January 31, 20X2) was $95 and not $75?
(a) The price fell to $72 from $100, so we can see that impairment has occurred. The next step is to determine if its other-than-temporary. The guidance tells us that an intent to sell would deem the impairment to be other-than-temporary. Facts above don’t point in the direction that Teddy will sell March Madness’s stock; therefore Teddy should not conclude that the investment is other-than-temporarily impaired.
(b) ASC 320-10-35-34 states an impairment loss shall be recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made. Therefore, the date that’s relevant for the calculation of the impairment charge is December 31, 20X1. The price as of January 31, 20X2 wouldn’t make any difference in the impairment charge. The price of $72 on December 31, 20X1 only would be …show more content…
(b) Does the answer change if TEDDY does not intend to sell the security and it is not more likely than not that it will be required to sell the security?
(a) ASC 320-10-35-33C states that an other-than-temporary impairment is necessary to recognize when the present value of the cash flows expected is less than the amortized cost of an available-for-sale security at a period end. The impairment is either classified as a credit loss or a non-credit loss, which is calculated as follows:
Credit loss: (Amortized Cost- Present Value of Cash Flow Expected)= ($100-$92)=$8
Non-Credit loss: (Present Value of Cash Flow Expected- Fair Value)=($92-$90)=$2
The impairment amount to be recorded by Teddy when Chatterbox is available for sale will be the sum of credit and non-credit loss, which is $10.
(b) Yes, the answer changes slightly when Teddy does not intend to sell the security. It will change to held- to-maturity, and the other-than-temporary impairment is only the credit loss. Therefore, Teddy will record only $8 if decides not to sell the
Should Teddy record an other-than-temporary impairment as of December 31, 20X1, and if so, for what amount on the following investments:
Investment 1: Happy New Year & Co.
Investment 2: Beary Beary.
Investment 3: Buy-A-Lot Company
For each investment clearly answer YES or NO, explain your reasoning, and if YES the amount.
ASC 320-10-35-21 states that impairment occurs when the fair values fall below the original costs. In all three investments, we need to determine if the impairment is other-than-temporary.
ASC 320-10-35-33 states that security shall be deemed temporarily impaired when an entity has decided to sell an impaired available-for-sale security and the entity does not expect the fair value of the security …show more content…
(b) Would the impairment charge as of December 31, 20X1, be different if the stock price at issuance of the financial statements (i.e., as of January 31, 20X2) was $95 and not $75?
(a) The price fell to $72 from $100, so we can see that impairment has occurred. The next step is to determine if its other-than-temporary. The guidance tells us that an intent to sell would deem the impairment to be other-than-temporary. Facts above don’t point in the direction that Teddy will sell March Madness’s stock; therefore Teddy should not conclude that the investment is other-than-temporarily impaired.
(b) ASC 320-10-35-34 states an impairment loss shall be recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made. Therefore, the date that’s relevant for the calculation of the impairment charge is December 31, 20X1. The price as of January 31, 20X2 wouldn’t make any difference in the impairment charge. The price of $72 on December 31, 20X1 only would be …show more content…
(b) Does the answer change if TEDDY does not intend to sell the security and it is not more likely than not that it will be required to sell the security?
(a) ASC 320-10-35-33C states that an other-than-temporary impairment is necessary to recognize when the present value of the cash flows expected is less than the amortized cost of an available-for-sale security at a period end. The impairment is either classified as a credit loss or a non-credit loss, which is calculated as follows:
Credit loss: (Amortized Cost- Present Value of Cash Flow Expected)= ($100-$92)=$8
Non-Credit loss: (Present Value of Cash Flow Expected- Fair Value)=($92-$90)=$2
The impairment amount to be recorded by Teddy when Chatterbox is available for sale will be the sum of credit and non-credit loss, which is $10.
(b) Yes, the answer changes slightly when Teddy does not intend to sell the security. It will change to held- to-maturity, and the other-than-temporary impairment is only the credit loss. Therefore, Teddy will record only $8 if decides not to sell the