1. Northstar Resources Inc. invests in a bond for $55 million. The bond was purchased at par and is accounted for using amortized cost. At year end, management feels that there has been a significant increase in credit risk and that there is a five percent (5%) chance that the company will not collect fifty percent (50%) of the face value of the bond over its life. Northstar Resources uses the expected loss impairment model.

Discuss the financial reporting issues (recognize or do not recognize) and provide recommendation(s) on how to handle each situation.