On January 1, 2022, Covington Corp. invested in bonds with a period of 10 years amounting...

 

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On January 1, 2022, Covington Corp. invested in bonds with a period of 10 years amounting to US$ 1,000,000. Interest is paid annually. The bond's coupon rate and Effective Interest Rate (EIR) is 8%. Covington Corp. classifies the investment as a financial asset at amortized cost. At the end of the period, December 31, 2022, using the most relevant information, Covington Corp makes the following estimates:: 1) bonds have a 12-month probability of default (PD) of 0.6%; 2) Loss Given default (LGD)- which is the estimated amount of loss if the bond defaults- is 40%; and 3) 3) the probability of default (PD) over life is 20%. Covington Corp. uses an internal credit rating system of 1 to 10, with 1 indicating the lowest credit risk and 10 indicating the highest credit risk. Covington Corp. considers the two rating upgrades to indicate a significant increase in credit risk. Covington Corp. has a policy that ratings of 3 and below are low credit risk. The credit rating of this bond payable as of December 31, 2022 is 3 and at the beginning of the period January 1, 2022, the debt rating of this bond is 2. Required: Compute and make entries for impairment of financial assets (if any). The initial balance of the allowance for impairment losses is Rp 500 million On January 1, 2022, Covington Corp. invested in bonds with a period of 10 years amounting to US$ 1,000,000. Interest is paid annually. The bond's coupon rate and Effective Interest Rate (EIR) is 8%. Covington Corp. classifies the investment as a financial asset at amortized cost. At the end of the period, December 31, 2022, using the most relevant information, Covington Corp makes the following estimates:: 1) bonds have a 12-month probability of default (PD) of 0.6%; 2) Loss Given default (LGD)- which is the estimated amount of loss if the bond defaults- is 40%; and 3) 3) the probability of default (PD) over life is 20%. Covington Corp. uses an internal credit rating system of 1 to 10, with 1 indicating the lowest credit risk and 10 indicating the highest credit risk. Covington Corp. considers the two rating upgrades to indicate a significant increase in credit risk. Covington Corp. has a policy that ratings of 3 and below are low credit risk. The credit rating of this bond payable as of December 31, 2022 is 3 and at the beginning of the period January 1, 2022, the debt rating of this bond is 2. Required: Compute and make entries for impairment of financial assets (if any). The initial balance of the allowance for impairment losses is Rp 500 million

Answer rating: 100% (QA)

Answer Allowance for impairment losses on financial assets at amortized cost January 1 2022 Rp 500 m... View the full answer