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Case 1 Astro

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Question 1- For the following investments, determine if Astro should record an other-than-temporary impairment as of December 31, 2014, and if so, for what amount: * Happy New Year & Co. * Beary Beary * Buy-A-Lot Company
According to ASC 320-10-35-30, the securities held in Happy New Year & Co. are not other than temporary. The codification states that the entity has to intend to sell the security, as well as, not expect to recover the entire amortized cost basis of the security. Happy New Year & Co. do not intend to sell the security because they believe that the decline in price is permanent.
The policy that Beary Beary has in place states that they are required to sell this security when the price drops below $90. The price of this security at December 31, 2014 is at $88, which is below the $90 policy. Although Beary Beary is still holding on to this investment while it is violating the policy, the policy means that they are intending to sell this security. In ASC 320-10-35-34B, the Other-than-temporary amount recorded is the full amount of the amortized cost basis minus the fair value amount. This makes the other than temporary loss amount recorded in earnings $8.
As part of ASC 320-10-35-30, it states that a security is other than temporary if the entity does not expect to recover the entire amortized cost basis of the security. This is the case with the security that Astro holds in Buy-A-Lot Company. However this security is not classified as other than temporary. This is because when assessing whether the entire cost basis will be recovered a number of factors are considered, one of which being a change to the rating of the security by a rating agency. S&P upgraded the rating from a BBB to a BBB+. This means that Astro could expect to recover the cost basis since it does not intend to sell the security in the future.
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