Nichols Corporation purchased 160000 of Holly Inc 55 bonds a

Nichols Corporation purchased $160,000 of Holly Inc. 5.5% bonds at par with the intent and ability to hold the bonds until they matured in 2022, so Nichols classifies its investment as held to maturity. Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the Holly investment to decline to $134,000 during 2018. Nichols calculates that, of the $26,000 decrease in fair value, $6,000 of it relates to credit losses and $20,000 relates to noncredit losses. Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols is planning to sell the bonds in the near future. Before-tax net income for 2018 will be reduced by:

Solution

Purchase price of bonds= $160000

Intrest = 160000*5.5% = $8800

Credit loss = 6000$

Net income = 8800-6000=$2800