(Impairment) Elaina Company has the following investments as of December 31, 2017:

Investments in the common stock of Laser Company \(1,500,000

Investment in debt securities of FourSquare Company \)3,300,000

In both investments, the carrying value and the fair value of these two investments are the same on December 31, 2017. Elaina’s

stock investments do not result in significant influence on the operations of Laser Company. Elaina’s debt investment is considered

held to maturity. On December 31, 2018, the shares in Laser Company are valued at \(1,100,000; the debt investment securities

of FourSquare is valued at \)2,500,000. Assume that these investments are considered impaired.

Instructions

(a) Prepare the journal entries to record the impairment of these two securities on December 31, 2018.

(b) Assuming the fair value of the Laser shares is \(1,400,000 and the value of its debt investment is \)2,950,000, what entries,

if any, should be recorded in 2019 related to impairment?

(c) Prepare the journal entries at December 31, 2018, assuming these securities are not impaired. (Ignore interest revenue entries.)

(d) Assume that the debt investment in FourSquare Company was available-for-sale and the expected credit loss was $900,000.

Prepare the journal entry to record this impairment on December 31, 2018.

Step by step solution

01

Journal entries for impaired securities

Date	Particulars	Debit	Credit
December 31, 2018	Available-for-sale securities ($1,500,000 - $1,100,000)	$400,000
	Unrealized loss- Other comprehensive income		$400,000
	(Being impairment of securities)

For Four Square company, no impairment entry is required.

02

 Journal entries for impaired securities

Date	Particulars	Debit	Credit
December 31, 2018	Available-for-sale securities ($1,500,000 - $1,400,000)	$100,000
	Unrealized loss- Other comprehensive income		$100,000
	(Being impairment of securities)

For Four Square company, no impairment entry is required.

03

Entry if securities not impaired

Date	Particulars	Debit	Credit
December 31, 2018	Loss on investment ($3,300,000-$2,500,000)	$800,000
	Investment held to maturity		$800,000
	(Being no impairment for four square company)

As these securities are not impaired so no entry is required.

04

Entry for Four Square company, as they are available-for-sale securities

Date	Particulars	Debit	Credit
December 31, 2018	Available-for-sale securities	$900,000
	Unrealized loss- Other comprehensive income		$900,000
	(Being impairment of securities)

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