Could someone breakdown what exactly is going on in this example? I doubt its that difficult. Let me know if I’m on the right track. When there is a 3MM charge that means that there is a loss. I’m confused how a LOSS can be impaired. But maybe it has to do with it being unrealized and could therefore possibly reverse. But if imparied this could never happen. So to account for this you take the 1MM and expense it. And then add 1MM to the 3MM loss recognized in the equity. Fiduciary had an investment in Portfolio A that had a market value of $7 million accounted for as available for sale. It had originally charged $3 million when Portfolio A was marked-to-market in the equity account on Fiduciary’s balance sheet. Now, it has been determined that $1 million of the $3 million charge has been permanently impaired. Fiduciary should: A) charge an additional $1 million against the income statement while recognizing an additional charge (debit) to the equity section of the balance sheet. B) reclassify $1 million by charging it against the income statement while recognizing a decrease (debit) to the equity section of the balance sheet. C) reclassify $1 million by charging it against the income statement while recognizing an increase (credit) to the equity section of the balance sheet. D) charge an additional $1 million against the equity section of the balance sheet. Your answer: B was incorrect. The correct answer was C) reclassify $1 million by charging it against the income statement while recognizing an increase (credit) to the equity section of the balance sheet. When there is an impairment of a previously realized charge that only affected the equity section of the balance sheet, a reclassification charge must be made to transfer the permanent impairment charge to the income statement. This accounting entry is a charge against the income statement with a corresponding credit or increase to the equity section.
well… since the the investment is AFS, the $3 million should flow through equity (other comprehensive income); however, accounting rules require that if the unrealized loss is other than temporary, that amount must be recognized (as a loss) through earnings. The $3 million unrealized loss (in OCI) would decline to $2 million because the initial $7 million is now carried on the balance sheet as $6 million. I think you pretty much have it.