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Company A estimated that it will receive less interest payments and principal payments from its Held-to-Maturity...

Company A estimated that it will receive less interest payments and principal payments from its Held-to-Maturity investments in Company B’s bonds. See the information below:

Amortized cost of Company B bonds:           $800,000.

Discounted value of estimated payments at the interest rate on the date of bond inception: $550,000.

Fair value of Company B bonds: $400,000.

How will Company A record this assessment?

a.

Company A will debit Allowance for Credit Losses by $250,000.

b.

Company A will credit Investment account by $800,000.

c.

Company A will credit Credit Loss Expense by $250,000.

d.

Company A will debit Credit Loss Expense by $250,000.

e.

Company A will not record this assessment given that the investment is HTM.

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Answer :

Correct answer is option d = company A will debit credit loss expense by $250,000

Explanation :

Held to maturity securities are carried at amortised cost at the year end but if the entity which has issued the bonds have trouble in making repayment , the credit loss needs to be booked in the income statement.

Credit loss expense is debited in income statement.

Amount of credit loss expense :-

= amortised cost - discounted value of estimated payment at the interest rate on the date of bond inception

=$ 800,000 - 550,000

=$ 250,000

Following entry will be made to book credit loss :

Debit credit loss expense $ 250,000

Credit allowance for credit loss $ 250,000

Thus option d is correct answer.

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