Instructions: You may talk to me and your classmates about this assignment, but you must complete the assignment yourself. The assignment is due at 11:59 pm on June 15, 2020.
Setup: At the beginning of year 1, Uncertain Bank purchases a three-year, annual-paying, 10% coupon rate, and $100 face value bond for $100. Uncertain classifies the bond as an AFS security. At the end of year 1, Uncertain receives a coupon payment of $8 on the bond, and it expects to receive coupon payments of $8 in years 2 and 3 and a face value payment of $80 at the end of year 3. At the end of year 2, Uncertain receives a coupon payment of $9 and it expects to receive a coupon payment of $9 and a face value payment of $90 at the end of year 3.
To do:
1) Record the journal entries for Uncertain’s purchase and holding of the AFS security in year 1 prior to the impairment at the end of the year.
2) Assume that at the end of year 1 Uncertain expects that it is more likely than not that it will be required to sell the AFS security, but that it does not do so subsequently. Record the journal entries for the impairment of the AFS security at the end of year 1 and all journal entries in years 2 and 3.
3) Assume that at the end of year 1 Uncertain does not expect to sell the AFS security or that it is more likely than not that it will be required to do so. Record the journal entries for the impairment of the security at the end of year 1 and all journal entries in years 2 and 3.
4) Briefly explain which of the accounting approaches in part 2 versus part 3 better captures the economics of the AFS security.