Rushia Company has an available-for-sale investment in the 10%, 10-year bonds of Pear Co. The investment’s carrying value is $3,200,000 at December 31, 2010. On January 9, 2011, Rushia learns that Pear Co. has lost its primary manufacturing facility in an uninsured fire. As a result, Rushia determines that the investment is impaired and now has a fair value of $2,300,000. In June, 2012, Pear Co. has succeeded in rebuilding its manufacturing facility, and its prospects have improved as a result.
If Rushia Company determines that the fair value of the investment is now $3,900,000 and is using U.S. GAAP for its external financial reporting, which of the following is true?
a. Rushia is prohibited from recording the recovery in value of the impaired investment.
b.Rushia may record a recovery of $900,000.
c.Rushia may record a recovery of $700,000.
d.Rushia may record a recovery of $1,600,000.
If Rushia Company determines that the fair value of the investment is now $2,900,000 and is using iGAAP for its external financial reporting, which of the following is true?
a.Rushia is prohibited from recording the recovery in value of the impaired investment.
b.Rushia may record a recovery of $600,000.
c.Rushia may record a recovery of $900,000.
d.Rushia may record a recovery, but is limited to 80% of the value of the recovery
To determine the correct answer, we need to understand the accounting treatment of impaired investments under U.S. GAAP (Generally Accepted Accounting Principles) and iGAAP (International Generally Accepted Accounting Principles).
Under U.S. GAAP, once an investment is impaired, the impairment loss is recognized by reducing the carrying value of the investment to its fair value. Any subsequent increase in the fair value of the impaired investment is not recognized. Therefore, the correct answer for the first scenario (fair value of $3,900,000) under U.S. GAAP is:
a. Rushia is prohibited from recording the recovery in value of the impaired investment.
On the other hand, under iGAAP, once an investment is impaired, the impairment loss is recognized by reducing the carrying value of the investment to its fair value. However, subsequent recoveries in the fair value of the impaired investment can be recognized. But there is generally a limitation on the amount that can be recovered. The recoverable amount is typically limited to the amount of the original impairment loss, reduced by any subsequent amortization of the impairment loss. Therefore, the correct answer for the second scenario (fair value of $2,900,000) under iGAAP is:
b. Rushia may record a recovery of $600,000.
It's important to note that specific guidelines and requirements may vary depending on the specific accounting standards and jurisdiction, so it is always recommended to refer to the relevant accounting standards or consult with professionals for accurate information and guidance.