Monster Beverage Corporation is a public U.S. company that produces and distributes "alternative" energy drinks. Its 2013 balance sheet includes \($396\) million in held-to-maturity bonds. Monster reports its HTM securities as follows:

Assume that the HTM bonds on Monster’s 2013 balance sheet have a 2-year remaining life, were acquired at par, and pay interest each December 31 at 4 percent. Monster determines that due to an other-than-temporary decline in the issuer’s liquidity, no additional interest payments are expected, but \($325\) million of principal is recoverable at maturity.

Required

a. Calculate Monster’s impairment loss for 2013. Round to the nearest million.

b. Assume that on December 31, 2014, the issuer’s financial health has improved and the bonds’ fair value is now \($396\) million. How does Monster report this information?

c. If Monster receives all contractual principal and interest payments, what is the actual yield on the bond investment for 2014 and 2015?

Transcribed Image Text:

Held-to-maturity securities are recorded at amortized cost which approximates fair market value. The Company evaluates whether the decline in fair value of its investments is other-than-temporary at each quarter-end. This evaluation consists of a review by management, and includes market pricing information and maturity dates for the securities held, market and economic trends in the industry and information on the issuer's financial condition and, if applicable, information on the guarantors' financial condition. Factors considered in determining whether a loss is temporary include the length of time and extent to which the investment's fair value has been less than its cost basis, the financial condition and near-term prospects of the issuer and guarantors, including any specific events which may influence the operations of the issuer and our intent and ability to retain the investment for a rea- sonable period of time sufficient to allow for any anticipated recovery of fair value. (Note 1 to Monster Beverage Corporation 2013 financial statements)