Espana Corporation purchased $100,000 of Hales Inc. 6% bonds at par and classifi

Question

Espana Corporation purchased $100,000 of Hales Inc. 6% bonds at par and classifies its investment as available for sale. 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. Espana views this decline as an other-than-temporary impairment. Espana 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 Espana accounts for the Hales bonds under IAS No. 39, before-tax net income for 2018 will be reduced by

A.$20,000.

B. $10,000.

C. $0.

D. $30,000.

Explanation / Answer

Solution: If Espana accounts for the Hales bonds under IAS No. 39, before-tax net income for 2018 will be $10,000

Explanation: Under IAS No. 39 fair value through credit loss i.e. $10,000 will be included

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