Tsui Corporation owns corporate bonds at December 31, 2020, accounted for using the amortized cost model. These bonds have a par value of $800,000 and an amortized cost of $788,000. After an impairment review was triggered, Tsui determined that the discounted impaired cash flows are $737,500 using the current market rate of interest, but are $734,000 using the market rate when the bonds were first acquired. The company follows a policy of directly reducing the carrying amount of any impaired assets. For simplicity purposes, assume that no impairment loss had been recorded earlier.

Instructions

a. Assuming Tsui Corporation is a private enterprise that applies ASPE, prepare any necessary journal entry(ies) related to (1) the impairment at December 31, 2020, and (2) a December 31, 2021 fair value of $760,000 and an adjusted carrying amount at that date of $741,500.

b. Assuming that Tsui Corporation applies IFRS and that there has been a significant increase in credit risk, prepare any necessary journal entry(ies) related to (1) the impairment at December 31, 2020, and (2) a December 31, 2021 fair value of $760,000 and an adjusted carrying amount at that date of $741,500. Assume that the discounted cash flow numbers provided reflect the lifetime expected risk of default.

c. Assume that Tsui is a private enterprise under the situation described in part (a) and that the company uses a valuation allowance instead of directly reducing the carrying amount of the investment. Prepare the entries required in part (a) for (1) the impairment and (2) the subsequent increase in fair value.

d. Digging Deeper In practice, which method would recognize losses earlier—the incurred loss model or the expected loss model? Explain briefly.