Wang Corporation purchased $100,000 of Hales Inc. 6% bonds at par with the intent and ability to hold the bonds until they matured in 2022, so Wang classifies its investment as held to maturity. Unfortunately, a combination of problems at Hales and in the debt market caused the fair value of the Hales investment to decline to $70,000 during 2018. Wang views this decline as an other-than-temporary (OTT) impairment. Wang calculates that, of the $30,000 drop in fair value, $10,000 of it relates to credit losses and $20,000 relates to non-credit losses. If Wang accounts for the Hales bonds under IAS No. 39, before-tax net income for 2018 will be reduced by:

Question

Quizplus · Accepted Answer

Under IAS No. 39, when an investment classified as held to maturity experiences an other-than-temporary impairment, the impairment recognized in profit or loss is the amount related to credit losses. In this case, the credit loss is $10,000, which is the amount by which the before-tax net income for 2018 will be reduced. Non-credit losses are not recognized in profit or loss under IAS No. 39 for held-to-maturity investments.

Wang Corporation Purchased $100,000 of Hales Inc