Nichols Corporation purchased $100,000 of Holly Inc. 6% bonds at par with the intent and ability to hold the bonds until they matured in 2022, so Nichols classifies its investment as held to maturity. Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the Holly investment to decline to $70,000 during 2018. Nichols calculates that, of the $30,000 decrease in fair value, $10,000 of it relates to credit losses and $20,000 relates to noncredit losses. Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols is planning to sell the bonds in the near future. Before-tax net income for 2018 will be reduced by:

Question

Quizplus · Accepted Answer

Since Nichols plans to sell the bonds, the entire impairment loss of $30,000 (both credit and noncredit losses) is recognized in earnings, reducing the before-tax net income by $30,000.

Nichols Corporation Purchased $100,000 of Holly Inc