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Concept Introduction:
Fair value of Securities:
When an investment is purchased, it is required to revalue the investment at the end of the year in order to make sure the fair value is correctly reflected in the financial statements.
Fair value refers to the realizable value of the securities at the end of a reporting period. It can be viewed as the replacement cost of the securities if such securities were purchased today.
If the cost of purchase is higher than the fair value of the investment at the time of revaluation, then the difference is debited to the fair value adjustments account.
If the cost of purchase is lower than the fair valueof the investment at the time of revaluation, then the difference is debited to the fair value adjustments account.
Journal entries are the first step in recording financial transactions and preparation of financial statements.
These represent the impact of the financial transaction and demonstrate the effect on the accounts impacted in the form of debits and credits.
Assets and expenses have debit balances and Liabilities and Incomes have credit balances and according to the business transaction, the accounts are appropriately debited will be credited by credited to reflect the effect of business transactions and events.
Requirement 1:
Journal entries to record the transactions including fair value adjustments
Answer to Problem 2APSA
Following are the Journal entries to record the transactions including fair value adjustments
| Date | Particulars | Debit ($) | Credit ($) |
| Year 1 | |||
| Jan-20 | Bonds (Johnson & Johnson) | $20,500.00 | |
| Cash | $20,500.00 | ||
| (Being Bonds purchased) | |||
| Feb-09 | Notes (Sony) | $55,440.00 | |
| Cash | $55,440.00 | ||
| (Being Notes purchased) | |||
| Jun-12 | Bonds (Mattel) | $40,500.00 | |
| Cash | $40,500.00 | ||
| (Being Bonds purchased) | |||
| Dec-31 | Fair Value Adjustment | $ 2,940.00 | |
| Notes (Sony) | $ 2,940.00 | ||
| (Being fair value adjustments made) | |||
| Dec-31 | Bonds (Johnson & Johnson) | $ 1,000.00 | |
| Bonds (Mattel) | $ 5,850.00 | ||
| Fair Value Adjustment | $ 6,850.00 | ||
| (Being fair value adjustments made) | |||
| Year 2 | |||
| Apr-15 | Cash | $23,500.00 | |
| Gain on sale of investments | $ 2,000.00 | ||
| Bonds (Johnson & Johnson) | $21,500.00 | ||
| (Being Bonds sold) | |||
| Jul-05 | Cash | $35,850.00 | |
| Loss on Sale of Investments | $10,500.00 | ||
| Bonds (Mattel) | $46,350.00 | ||
| (Being Bonds sold) | |||
| Jul-22 | Notes (Sara Lee) | $13,500.00 | |
| Cash | $13,500.00 | ||
| (Being Notes purchased) | |||
| Aug-19 | Bonds (Kodak) | $15,300.00 | |
| Cash | $15,300.00 | ||
| (Being Bonds purchased) | |||
| Dec-31 | Bonds (Kodak) | $ 2,025.00 | |
| Notes (Sony) | $ 4,560.00 | ||
| Fair Value Adjustment | $ 6,585.00 | ||
| (Being fair value adjustments made) | |||
| Dec-31 | Fair Value Adjustment | $ 1,500.00 | |
| Notes (Sara Lee) | $ 1,500.00 | ||
| (Being fair value adjustments made) | |||
| Year 3 | |||
| Feb-27 | Bonds (Microsoft) | $ 160,800.00 | |
| Cash | $ 160,800.00 | ||
| (Being Bonds purchased) | |||
| Jun-21 | Cash | $57,600.00 | |
| Loss on Sale of Investments | $ 2,400.00 | ||
| Bonds (Sony) | $60,000.00 | ||
| (Being Bonds sold) | |||
| Jun-30 | Bonds (Black and Decker) | $50,400.00 | |
| Cash | $50,400.00 | ||
| (Being Bonds purchased) | |||
| Aug-03 | Cash | $ 9,750.00 | |
| Loss on Sale of Investments | $ 2,250.00 | ||
| Bonds (Sara Lee) | $12,000.00 | ||
| (Being Notes sold) | |||
| Nov-01 | Cash | $20,475.00 | |
| Gain on sale of investments | $ 3,150.00 | ||
| Bonds (Kodak) | $17,325.00 | ||
| (Being Bonds sold) | |||
| Dec-31 | Fair Value Adjustment | $ 2,200.00 | |
| Bonds (Microsoft) | $ 2,200.00 | ||
| (Being fair value adjustments made) | |||
| Dec-31 | Bonds (Black and Decker) | $ 4,200.00 | |
| Fair Value Adjustment | $ 4,200.00 | ||
| (Being fair value adjustments made) |
Explanation of Solution
Assets and Expenses have debit balances and must be debited in order to increase their balance and credited in order to decrease their balance. Examples − Bonds and Notes of other companies, Cash, Loss on sale of Investments
Liabilities and Incomes have credit balances and must be debited in order to decrease their balance and credited in order to increase their balance.Examples − Gain on sale of Investments
When an investment is made, it must be revalued at the end of the year to determine if it is in line with the fair value or the realizable value.
Such a revaluation seeks to eliminate the difference between the cost of purchase and the realizable value of the investment at the end of the year.
If the cost of purchase is higher than the fair value, then the difference is debited to the fair value adjustments account.
If the cost of purchase is lower than the fair value, then the difference is debited to the fair value adjustments account.
In Year 1,
OnJan-20Bonds (Johnson & Johnson)will be debited by $20,500.00 and Cashwill be credited by $20,500.00 since Bonds purchased.
OnFeb-09Notes (Sony)will be debited by $55,440.00 and Cashwill be credited by $55,440.00 since Notes purchased.
OnJun-12Bonds (Mattel)will be debited by $40,500.00 and Cashwill be credited by $40,500.00 since Bonds purchased.
OnDec-31Fair Value Adjustment will be debited by$2,940.00 and Notes (Sony)will be credited by $2,940.00 since fair value adjustments made.
OnDec-31Bonds (Johnson & Johnson)will be debited by $1,000.00, Bonds (Mattel)will be debited by$5,850.00and Fair Value Adjustment will be credited by$6,850.00since fair value adjustments made.
In Year 2,
OnApr-15Cashwill be debited by $23,500.00, Gain on sale of investmentswill be credited by$2,000.00and Bonds (Johnson & Johnson)will be credited by $21,500.00 since Bonds sold.
OnJul-05Cashwill be debited by$35,850.00, Loss on Sale of Investmentswill be credited by $10,500.00 and Bonds (Mattel)will be credited by $46,350.00 since Bonds sold.
OnJul-22Notes (Sara Lee)will be debited by $13,500.00 and Cashwill be credited by $13,500.00 since Notes purchased.
OnAug-19Bonds (Kodak)will be debited by $15,300.00 and Cashwill be credited by $15,300.00 since Bonds purchased.
On Dec-31Bonds (Kodak)will be debited by$2,025.00, Notes (Sony)will be debited by$4,560.00andFair Value Adjustment will be credited by$6,585.00since fair value adjustments made.
On Dec-31Fair Value Adjustment will be debited by$1,500.00 andNotes (Sara Lee) will be debited by$1,500.00since fair value adjustments made.
In Year 3,
On Feb-27Bonds (Microsoft)will be debited by$ 160,800.00 and Cashwill be credited by$ 160,800.00since Bonds purchased.
On Jun-21Cashwill be debited by $57,600.00, Loss on Sale of Investmentswill be debited by$2,400.00 and Bonds (Sony)will be credited by $60,000.00 since Bonds sold.
On Jun-30Bonds (Black and Decker)will be debited by $50,400.00 andCashwill be credited by $50,400.00 since Bonds purchased.
On Aug-03Cashwill be debited by$9,750.00, Loss on Sale of Investmentswill be debited by$2,250.00and Bonds (Sara Lee)will be credited by $12,000.00 since Notes sold.
On Nov-01Cashwill be debited by $20,475.00,Gain on sale of investmentswill be credited by$3,150.00and Bonds (Kodak) will be credited by $17,325.00 since Bonds sold.
On Dec-31Fair Value Adjustment will be debited by$2,200.00and Bonds (Microsoft)will be credited by$2,200.00since fair value adjustments made.
On Dec-31Bonds (Black and Decker)will be debited by$4,200.00 and Fair Value Adjustment will be credited by$4,200.00since fair value adjustments made.
Hence the transactions are journalized and fair value adjustments are made.
Concept Introduction:
Fair value of Securities:
When an investment is purchased, it is required to revalue the investment at the end of the year in order to make sure the fair value is correctly reflected in the financial statements.
Fair value refers to the realizable value of the securities at the end of a reporting period. It can be viewed as the replacement cost of the securities if such securities were purchased today.
If the cost of purchase is higher than the fair value of the investment at the time of revaluation, then the difference is debited to the fair value adjustments account.
If the cost of purchase is lower than the fair valueof the investment at the time of revaluation, then the difference is debited to the fair value adjustments account.
Requirement 2:
Table showing details of total cost of purchase, total fair value adjustments and total available value of securities at the end of each year.
Answer to Problem 2APSA
Following table shows details of total cost of purchase, total fair value adjustments and total available value of securities at the end of each year.
| Year | Bonds and Notes | Total Cost | Total Fair Value Adjustments | Total Value of Portfolio available for Sale |
| 1 | Johnson and Johnson | $20,500.00 | $ 1,000.00 | $21,500.00 |
| Sony | $55,440.00 | $(2,940.00) | $52,500.00 | |
| Mattel | $40,500.00 | $ 5,850.00 | $46,350.00 | |
| Total | $ 116,440.00 | $ 3,910.00 | $ 120,350.00 | |
| 2 | Kodak | $15,300.00 | $ 2,025.00 | $17,325.00 |
| Sara Lee | $13,500.00 | $(1,500.00) | $12,000.00 | |
| Sony | $55,440.00 | $ 4,560.00 | $60,000.00 | |
| Total | $84,240.00 | $ 5,085.00 | $89,325.00 | |
| 3 | Black and Decker | $50,400.00 | $ 4,200.00 | $54,600.00 |
| Microsoft | $ 160,800.00 | $(2,200.00) | $ 158,600.00 | |
| Total | $ 211,200.00 | $ 2,000.00 | $ 213,200.00 |
Explanation of Solution
When an investment is made, it must be revalued at the end of the year to determine if it is in line with the fair value or the realizable value.
Such a revaluation seeks to eliminate the difference between the cost of purchase and the realizable value of the investment at the end of the year.
If the cost of purchase is higher than the fair value, then the difference is debited to the fair value adjustments account.
If the cost of purchase is lower than the fair value, then the difference is debited to the fair value adjustments account.
In the above table, Total Fair Value Adjustments is calculated as the Total Value of Portfolio available for Sale less the total cost of purchase and appropriate debit or credit is made to the Fair value adjustments account at the end of the year in order to correctly reflect the value in the financial statements.
Hence the table showing details of total cost of purchase, total fair value adjustments and total available value of securities at the end of each year is prepared.
Concept Introduction:
Fair value of Securities:
When an investment is purchased, it is required to revalue the investment at the end of the year in order to make sure the fair value is correctly reflected in the financial statements.
Fair value refers to the realizable value of the securities at the end of a reporting period. It can be viewed as the replacement cost of the securities if such securities were purchased today.
If the cost of purchase is higher than the fair value of the investment at the time of revaluation, then the difference is debited to the fair value adjustments account.
If the cost of purchase is lower than the fair valueof the investment at the time of revaluation, then the difference is debited to the fair value adjustments account.
Requirement 3:
Table showing details of total cost of purchase, Unrealized Gain / (Losses), Realized Gain / (Losses) and Total Value of Portfolio available for Sale
Answer to Problem 2APSA
Following Table shows details of total cost of purchase, Unrealized Gain / (Losses), Realized Gain / (Losses) and Total Value of Portfolio available for Sale
| Year | Bonds and Notes | Total Cost | Unrealized Gain / (Losses) | Realized Gain / (Losses) | Total Value of Portfolio available for Sale |
| 1 | Johnson and Johnson | $20,500.00 | $ 1,000.00 | $ - | $21,500.00 |
| Sony | $55,440.00 | $(2,940.00) | $ - | $52,500.00 | |
| Mattel | $40,500.00 | $ 5,850.00 | $ - | $46,350.00 | |
| Total | $ 116,440.00 | $ 3,910.00 | $ - | $ 120,350.00 | |
| 2 | Johnson and Johnson | $20,500.00 | $ - | $ 3,000.00 | $ - |
| Mattel | $40,500.00 | $ - | $(4,650.00) | $ - | |
| Kodak | $15,300.00 | $ 2,025.00 | $ - | $17,325.00 | |
| Sara Lee | $13,500.00 | $(1,500.00) | $ - | $12,000.00 | |
| Sony | $55,440.00 | $ 4,560.00 | $ - | $60,000.00 | |
| Total | $ 145,240.00 | $ 5,085.00 | $(1,650.00) | $89,325.00 | |
| 3 | Sony | $55,440.00 | $ - | $ 2,160.00 | $ - |
| Sara Lee | $13,500.00 | $ - | $(3,750.00) | ||
| Kodak | $15,300.00 | $ - | $ 5,175.00 | $ - | |
| Black and Decker | $50,400.00 | $ 4,200.00 | $ - | $54,600.00 | |
| Microsoft | $ 160,800.00 | $(2,200.00) | $ - | $ 158,600.00 | |
| Total | $ 295,440.00 | $ 2,000.00 | $ 3,585.00 | $ 213,200.00 |
Explanation of Solution
When an investment is made, it must be revalued at the end of the year to determine if it is in line with the fair value or the realizable value.
Such a revaluation seeks to eliminate the difference between the cost of purchase and the realizable value of the investment at the end of the year.
If the cost of purchase is higher than the fair value and the investment is not sold at the end of the year, then the difference is an unrealized loss.
If the cost of purchase is lower than the fair value,and the investment is not sold at the end of the year then the difference is an unrealized gain.
In the above table, TotalUnrealized Gain / (Losses) is calculated as the Total Value of Portfolio available for Sale less the total cost of purchase and appropriate debit or credit is made to the Fair value adjustments account at the end of the year in order to correctly reflect the value in the financial statements.
The Realized Gain / (Losses) are calculated as the difference between the sale price and the total cost of purchase and appropriate debit or credit is made to the Gain / Loss on sale of adjustments account to correctly record the value in the financial statements.
Hence the Table showing details of total cost of purchase, Unrealized Gain / (Losses), Realized Gain / (Losses) and Total Value of Portfolio available for Sale is prepared.
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