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 calculates that the bonds have incurred credit losses. Before-tax net income for 2018 will be reduced by:

Question

Quizplus · Accepted Answer

Nichols Corporation has concluded that the Holly bonds are other-than-temporarily impaired because of credit losses incurred. Therefore, before-tax net income for 2018 will be reduced by the credit loss amount of $10,000 only, and not the noncredit loss amount of $20,000. The decrease due to noncredit losses is not recognized in the income statement as it is considered to be a temporary impairment. Therefore, the correct answer is B.

Nichols Corporation Purchased $100,000 of Holly Inc