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Financial Instruments – Other-Than-Temporary Impairment

In: Business and Management

Submitted By maniawys84
Words 753
Pages 4
Joseph Won
ACCT 351
Research Case 2
February 11, 2015

Financial Instruments – Other-Than-Temporary Impairment 1. For the following investments, determine if OTT should record an other-than-temporary impairment as of December 31, 20X1, and if so, for what amount:

• Happy New Year & Co.

* Since the fair value of investment is less than its cost, the Company should proceed to step 2 for identifying and accounting for impairment. However, there is no indication that OTT does not expect the fair value of the security to fully recover before the expected time of sale. The Company actually does not believe the decline in price to be permanent. In addition, it does not intend to sell this investment in the future. So, no record is needed.

(FASB 320-10-35-24 and 33)

• Beary Beary.

* Since the fair value of investment is less than its cost, the Company should proceed to step 2. An other-than-temporary impairment should be considered to have occurred because the Company intends to sell the note. Since OTT requires the sale of this security when the fair value declines below $90, the impairment should be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Therefore, the amount recorded should be $7.

(FASB 320-10-35-24, 33A, and 34B)

• Buy-A-Lot Company.

* Since the fair value of investment is less than its cost, the Company should proceed to step 2. OTT does not intend to sell this investment in the future. At the same time, it is possible that the entire amortized cost basis of the security can be recovered because the credit rating of Buy-A-Lot was upgraded. Therefore, no record is needed.

(FASB 320-10-35-24 and 33B/33C)

2. Assuming OTT has determined its investment in March Madness...

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