Instruction:

Case10-2

Poole Company purchases 5,000 shares of preferred stock issued by Ernst Company, a private manufacturer of specialized equipment, for $200,000. Poole Company has concluded that its investment meets the definition of an equity security. The preferred stock does not have a readily determinable fair value and does not qualify for the practical exception allowed in FASB ASC 820. Because of a significant technological advance by a competitor, Ernst Companys equipment technology becomes obsolete; as a result, its ability to attract new business has been adversely impacted and its cash flow projections have been revised downward. Poole Companys assessment resulted in recording an impairment loss of $50,000 resulting in a carrying value of $150,000. The following reporting period, Ernst Company issues additional shares of preferred stock to new investors. The preferred stock has the same terms as the preferred stock acquired by Poole Company. The new investors acquired the preferred shares for $35 per share.

Required:

  a.  How should Poole Company assess the need for an impairment charge?
  b.  How should Poole Company account for its investment in Ernst Company subsequent to learning of the new investment information?