Bloom Corporation purchased $1,000,000 of Taylor Company 5% bonds at par with the intent and ability to hold the bonds until they matured in 2020, so Bloom classifies their investment as HTM. Unfortunately, a combination of problems at Taylor Company and in the debt market caused the fair value of the Taylor investment to decline to $600,000 during 2011.

Required:

For each of the following scenarios, prepare appropriate entry(s) at December 31, 2011, and indicate how the scenario will affect the 2011 income statement (ignoring income taxes).

1. Bloom now believes it is more likely than not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value. Of the $400,000 decline in fair value, Bloom attributes $250,000 to credit losses, and $150,000 to noncredit losses.

2. Bloom does not plan to sell the Taylor bonds prior to maturity, and does not believe it is more likely than not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value. Of the $400,000 decline in fair value, Bloom attributes $250,000 to credit losses, and $150,000 to noncredit losses.

3. Bloom does not plan to sell the Taylor bonds prior to maturity, and does not believe it is more likely than not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value. Bloom attributes the entire $400,000 decline in fair value to noncredit losses.