[Anonymous]

Actually it’s from my textbook…

Bee Company 5% bonds, purchased at face value, with an amortized cost of $4,000,000, and classified as held to maturity. At December 31, 2011, the Bee investment had a fair value of $3,500,000, and Stewart calculated that $240,000 of the fair value decline is a credit loss and $260,000 is a noncredit loss. At December 31, 2012, the Bee investment had a fair value of $3,700,000, and Stewart calculated that $140,000 of the difference between fair value and amortized cost was a credit loss and $160,000 was a noncredit loss.

My answer is:

OTT impairment loss-IS 240,000

Discount on bond investment 240,000

OTT impairment loss-OCI 260,000

Fair value adjustment–Noncredit loss 260,000

Fair value adjustment–Noncredit loss 100,000

OTT impairment loss-OCI 100,000

But the correct answer is:

OTT impairment loss-IS 240,000

Discount on bond investment 240,000

OTT impairment loss-OCI 260,000

Fair value adjustment–Noncredit loss 260,000

The textbook says:

Most of the accounting is the same, but an important difference relates to the recognition of noncredit losses in OCI. HTM investments normally don’t include unrealized gains and losses in OCI, so these won’t routinely be adjusted up or down over time. Therefore, for HTM investments, GAAP requires that companies gradually reverse any amounts included in OCI over the remaining life of the investment, debiting the fair value adjustment and crediting OCI each period. After an OTT impairment is recorded, the usual treatment of unrealized gains or losses is resumed. Changes in fair value are reported in OCI for AFS investments, and are ignored for HTM investments. Reversals of impairments of debt and equity securities are prohibited under U.S. GAAP.

So why HTM doesn’t recover the noncredit loss in this question?

About this question below, I have no idea why the net unrealized gains and losses comes out in this way…

Jones Inc. 6% bonds, purchased at face value, with an amortized cost of $3,500,000, and classified as an available-for-sale investment. Because of unrealized losses prior to 2011, the Jones bonds have a fair value adjustment account with a credit balance of $400,000, such that the carrying value of the Jones investment is $3,100,000 prior to making any adjusting entries in 2011. At December 31, 2011, the Jones investment had a fair value of $2,700,000, and Stewart calculated that $225,000 of the difference between amortized cost and fair value is a credit loss and $575,000 is a noncredit loss.

Other-than-temporary impairment loss—I/S ….. 225,000

Investment in Jones bonds…………………………. 225,000

Net unrealized holding gains and losses—OCI .. 575,000

Fair value adjustment ……………………………….. 575,000

Fair value adjustment …………………………………… 400,000

Net unrealized holding gains and losses—OCI 400,000

Note that Stewart could net the latter two journal entries together to be:

Net unrealized holding gains and losses—OCI .. 175,000

Fair value adjustment ……………………………….. 175,000

I really appreciate your help!