Question - Impairment of Debt Securities
Cairo Corporation has municipal bonds classified as available-for-sale at December 31, 2010. These bonds have a par value of $822,000, an amortized cost of $822,000 and a fair value of $760,350. The unrealized loss of $61,650 previously recognized as other comprehensive income and as a separate component of stockholders' equity is now determined to be other than temporary. That is, the company believes that impairment accounting is now appropriate for these bonds.
(a) Prepare the journal entry to recognize the impairment.
(b) What is the new cost basis of the municipal bonds?
Given that the maturity value of the bonds is $822,000, should Cairo Corporation amortize the difference between the carrying amount and the maturity value over the life of the bonds?
(c) At December 31, 2011, the fair value of the municipal bonds is $808,350. Prepare the entry to record this information.