Chapter 15, Problem 2BP

Paris Inc. began operations in Year 1. Following is a series of transactions and events involving its long-term debt investments in available-for-sale securities.

Required

1. 1. Prepare journal entries to record these transactions and events and any year-end fair value adjustments to the portfolio of long-term available-for-sale debt securities.
2. 2. Prepare a table that summarizes the (a) total cost, (b) total fair value adjustment, and (c) total fair value for the portfolio of long-term available-for-sale debt securities at each year-end.
3. 3. Prepare a table that summarizes (a) the realized gains and losses and (b) the unrealized gains or losses for the portfolio of long-term available-for-sale debt securities at each year-end.

To determine

Prepare journal entries to record the given transaction.

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Prepare the journal entries to record the given transactions as follows:

Journal
Date	Account Title and Explanation	Post	Debit	Credit
		Ref.	($)	($)
March 10, Year 1	Debt Investments -AFS (Company A)		30,600
	Cash			30,600
	(To record the purchase of bonds)
April 7, Year 1	Debt Investments—AFS (Company F)		56,250
	Cash			56,250
	(To record the purchase of  F notes)
September, 1 Year 1	Debt Investments —AFS (Company P)		28,200
	Cash			28,200
	(To record the purchase of bonds)
December 31, Year 1	Fair Value Adjustment—AFS		1,950
	Unrealized Gain—Equity (LT) (2)			1,950
	(To record the annual adjustment to fair value of securities)
April 26, Year 2	Cash		51,250
	Loss on sale of debt investments (3)		5,000
	Debt investment—AFS (Company F)			56,250
	(To record the gain on sale of bond)
June 2, Year 2	Debt Investments—AFS (Company D)		34,650
	Cash			34,650
	(To record the purchase of  bond)
June 14, Year 2	Debt Investments —AFS (Company S)		25,200
	Cash			25,200
	(To record the purchase of  bond)
November, 27 Year 2	Cash		30,600
	Gain on Sale of Investments (4)			2,400
	Debt Investments—AFS (Company P)			28,200
	(To record the loss on sale of bond)
December 31, Year 2	Fair Value Adjustment—AFS		1,400
	Unrealized Gain—Equity (LT) (6)			1,400
	(To record the Annual adjustment to fair value of securities)
January 28, Year 3	Debt Investments—AFS (Company C)		40,000
	Cash			40,000
	(To record the purchase of bonds)
August 22, Year 3	Cash		25,800
	Loss on Sale of Investments (7)		4,800
	Debt Investments—AFS (Company A)			30,600
	(To record the sale of bond)
September 3, Year 3	Debt Investments—AFS (Company M)		84,000
	Cash			84,000
	(To record the purchase of bonds)
October 9, Year 3	Cash		28,800
	Gain on Sale of Investments  (8)			3,600
	Debt Investments—AFS (Company S)			25,200
	(To record the  sale of bonds)
October  31, Year 3	Cash		27,000
	Loss on Sale of Investments  (9)		7,650
	Debt Investments—AFS (Company D)			34,650
	(To record the sale of bond)
December 31, Year 3	Fair Value Adjustment—AFS		5,450
	Unrealized Gain—Equity (LT) (11)			5,450
	(To record the Annual adjustment to fair value of securities)

Table (1)

Working note:

Calculate the total cost and fair value of the bonds for Year 1:

Name of the company	Cost of debt investment	Fair value of debt investment
Company A	$30,600	$33,000
Company F	$56,250	$54,600
Company P	$28,200	$29,400
Total	$115,050	$117,000

Table (2)

…… (1)

Calculate the unrealized gain or loss for year 1:

$\begin{array}{c}\text{Unrealized gain or }\left(\text{loss}\right)=\left[\begin{array}{l}\text{Cost of longterm investment}-\text{Fair}\\ \text{value of long-term investment}\end{array}\right]\\ =\$115,050-\$117,000\\ =\$1,950\end{array}$ (2)

Calculate the value of cash received from the sale of stock investment (Company F stocks)

$\begin{array}{c}\text{Loss on sale of debt = }\left(\begin{array}{l}\text{Sales value of Company F}-\\ \text{Purchase valueof Company F}\end{array}\right)\\ =\$51,250-\$56,250\\ =\$(5,000)\end{array}$ (3)

Calculate the value of cash received from the sale of stock investment (Company P stocks)

$\begin{array}{c}\text{Gain on sale of debt = }\left(\begin{array}{l}\text{Sales value of Company P}-\\ \text{Purchase valueof Company P}\end{array}\right)\\ =\$30,600-\$28,200\\ =\$2,400\end{array}$ (4)

Calculate the total cost and fair value of the bonds for Year 2:

Name of the company	Cost of debt investment	Fair value of debt investment
Company A	S30,600	$31,200
Company F	$34,650	$32,400
Company S	$25,200	$27,600
Total	$90,450	$91,000

Table (3)

…… (5)

Calculate the unrealized gain or loss for year 2:

$\begin{array}{c}\text{Unrealized gain or }\left(\text{loss}\right)=\left[\begin{array}{l}\text{Cost of long-terminvestment}\\ -\text{Fair value of long-term}\\ \text{investment}\end{array}\right]-\left[\begin{array}{l}\text{Unrealized gain }\\ \text{or loss on Year 1}\end{array}\right]\\ =\left[\$90,450-\$91,000\right]-\$1,950\text{ (2)}\\ =\$1,400\end{array}$ (6)

Calculate the value of cash received from the sale of stock investment (Company A stocks)

$\begin{array}{c}\text{Loss on sale of debt = }\left(\begin{array}{l}\text{Sales value of Company A}-\\ \text{Purchase valueof Company A}\end{array}\right)\\ =\$25,800-\$30,600\\ =\$(4,800)\end{array}$ (7)

Calculate the value of cash received from the sale of stock investment (Company S stocks)

$\begin{array}{c}\text{Gain on sale of debt = }\left(\begin{array}{l}\text{Sales value of Company S}-\\ \text{Purchase valueof Company S}\end{array}\right)\\ =\$28,800-\$25,200\\ =\$3,600\end{array}$ (8)

Calculate the value of cash received from the sale of stock investment (Company D stocks)

$\begin{array}{c}\text{Loss on sale of debt = }\left(\begin{array}{l}\text{Sales value of Company D}-\\ \text{Purchase valueof Company D}\end{array}\right)\\ =\$27,000-\$34,650\\ =\$(7,650)\end{array}$ (9)

Calculate the total cost and fair value of the bonds for Year 3:

Name of the company	Cost of debt investment	Fair value of debt investment
Company C	$40,000	$48,000
Company M	$84,000	$82,000
Total	$124,000	$130,000

Table (4)

  …… (10)

Calculate the unrealized gain or loss for year 3:

$\begin{array}{c}\text{Unrealized gain or }\left(\text{loss}\right)=\left[\begin{array}{l}\text{Cost of long-terminvestment}\\ -\text{Fair value of long-term}\\ \text{investment}\end{array}\right]-\left[\begin{array}{l}\text{Unrealized gain }\\ \text{or loss on Year 2}\end{array}\right]\\ =\left[\$124,000-\$130,000\right]-\$550\text{ (5)}\\ =\$5,450\end{array}$ (11)

To determine

Prepare a table that summarizes the following

1. a. Total cost,
2. b. Total fair value adjustments,
3. c. Total fair value of the portfolio of long-term available-for-sale securities at year-end.

Explanation of Solution

Prepare a table that summarizes the total cost, total fair value adjustments, and the total fair value as follows:

Particulars	December 31, Year 1	December 31, Year 2	December 31, Year 3
a. Long-term AFS Securities (cost)	$115,050	$90,450	$124,000
b. Fair Value Adjustment	1,950	550	6,000
c. Long-term AFS Securities (fair value)	$117,000	$91,000	$130,000

Table (5)

To determine

Prepare a table that summarizes the following

1. a. The realized gains and losses,
2. b. The unrealized gains and losses for the portfolio of long-term available-for-sale securities at year-end.

Explanation of Solution

1. a. Prepare a table that summarizes the realized gains and losses as follows:

Particulars	Year 1	Year 2	Year 3
Realized gains (losses)
Sale of F shares		$(5,000 )
Sale of P shares		2,400
Sale of A shares			$(4,800)
Sale of S shares			$3,600
Sale of D shares			$(7,650)
Total realized gain (loss)	$0	$ (2,600)	$(8,850)

Table (6)

1. b. Prepare a table that summarizes the Unrealized gains and losses as follows

Particulars	Year 1	Year 2	Year 3
Unrealized gains (losses) at year-end	$1,950	$    550	$ 6,000

 Table (7)