Chapter 15, Problem 3APSA

To determine

1.

Introduction:

Available for Sale securities are those securities which can neither be classified as Trading securities nor as Held to Maturity Security.

Trading securities are securities which are intended to be sold in the short term.

Held to Maturity Securities are the investments which are intended to be held until maturity date.

Available for sale securities may be classified as long-term assets if they are intended to be held for a period of more than a year. Available for Sale securities are recorded at their fair values and any unrealized gains or losses are reported in other comprehensive income until they have been realized. (i.e. by selling the securities)

To Prepare:

Journal Entries to record transactions involving long term available for sale securities investments and events and fair value adjustments to the portfolio of long term available for sale securities.

Answer to Problem 3APSA

Solution:

Serial No.	Date	Particulars	Debit ($)	Credit ($)
1	20/01/2017	Investment- Long Term Available for Sale Securities A/c	20740
		Cash A/c		20740
		(Being purchased 1000 shares of Johnsons & Johnsons @ $20.50 per share plus $240 commission)
2	09/02/2017	Investment- Long Term Available for Sale Securities A/c	55665
		Cash A/c		55665
		(Being purchased 1200 shares of Sony @ $46.20 per share plus $225 commission)
3	12/06/2017	Investment- Long Term Available for Sale Securities A/c	40695
		Cash A/c		40695
		(Being purchased 1500 shares of Mattel @ $27 per share plus $195 commission)
4	31/12/2017	Unrealised Gain/Loss-Other Comprehensive Income A/c	3650
		Investment- Long Term Available for Sale Securities A/c		3650
		(Being Unrealised Loss on revaluation of Investment- Long Term Available for Sale Securities A/c recognized)
5	15/04/2018	Cash A/c	22975
		Unrealised Gain/Loss-Other Comprehensive Income A/c	760
		Investment- Long Term Available for Sale Securities A/c		21500
		Realised Gain on Available for Sale Securities A/c		2235
		(Being Sold 1000 shares of Johnsons and Johnsons at $23.50 less $525 commission and gains accounted for)
6	05/07/2018	Cash A/c	35615
		Unrealised Gain/Loss-Other Comprehensive Income A/c	5655
		Realised Loss on Available for Sale Securities A/c	5080
		Investment- Long Term Available for Sale Securities A/c		46350
		(Being Sold 1500 shares of Mattel at $23.90 less $235 commission and loss accounted for)
7	22/07/2018	Investment- Long Term Available for Sale Securities A/c	13980
		Cash A/c		13980
		(Being purchased 600 shares of Sara Lee @ $22.50 per share plus $480 commission)
8	19/08/2018	Investment- Long Term Available for Sale Securities A/c	15498
		Cash A/c		15498
		(Being purchased 900 shares of Eastman Kodak@ $17 per share plus $198 commission)
9	31/12/2018	Unrealised Gain/Loss-Other Comprehensive Income A/c	3753
		Investment- Long Term Available for Sale Securities A/c		3753
		(Being Unrealised Loss on revaluation of Investment- Long Term Available for Sale Securities A/c recognized)
10	27/02/2019	Investment- Long Term Available for Sale Securities A/c	161325
		Cash A/c		161325
		(Being purchased 2400 shares of Microsoft@ $67.00 per share plus $525 commission)
11	21/06/2019	Cash A/c	56720
		Realised Gain on Available for Sale Securities A/c		1055
		Investment- Long Term Available for Sale Securities A/c		42000
		Unrealised Gain/Loss-Other Comprehensive Income A/c		13665
		(Being Sold 1200 shares of Sony at $48.00 per share less $880 commission and gain accounted for)
12	30/06/2019	Investment- Long Term Available for Sale Securities A/c	50835
		Cash A/c		50835
		(Being purchased 1400 shares of Black & Decker@ $36.00 per share plus $435 commission)
13	03/08/2019	Cash A/c	9315
		Realised Loss on Available for Sale Securities A/c	4665
		Investment- Long Term Available for Sale Securities A/c		12000
		Unrealised Gain/Loss-Other Comprehensive Income A/c		1980
		(Being Sold 600 shares of Sara Lee at $16.25 per share less $435 commission and loss accounted for)
14	01/11/2019	Cash A/c	19850
		Unrealised Gain/Loss-Other Comprehensive Income A/c	1827
		Realised Gain on Available for Sale Securities A/c		4352
		Investment- Long Term Available for Sale Securities A/c		17325
		(Being Sold 900 shares of Eastman Kodak at $22.75 per share less $625 commission and gain accounted for)
15	31/12/2019	Investment- Long Term Available for Sale Securities A/c	8040
		Unrealised Gain/Loss-Other Comprehensive Income A/c		8040
		(Being Unrealised Gain on revaluation of Investment- Long Term Available for Sale Securities A/c recognized)

Explanation of Solution

Explanation and Calculations:

The journal entries are explained as below:

Entry Date	Explanation and Calculation
20/01/2017	Since Investment in long term Available for sale securities has been purchased it has been debited and since cash has been paid it has been credited. Fees and commission paid on purchase of securities are included in the value of the said securities. The calculation of value is as shown: $\left(1000*20.50\right)+240=20740$
09/02/2017	Since Investment in long term Available for sale securities has been purchased it has been debited and since cash has been paid it has been credited. Fees and commission paid on purchase of securities are included in the value of the said securities. The calculation of value is as shown: $\left(1200*46.20\right)+225=55665$
12/06/2017	Since Investment in long term Available for sale securities has been purchased it has been debited and since cash has been paid it has been credited. Fees paid on purchase of securities are included in the value of the said securities. The calculation of value is as shown: $\left(1500*27\right)+195=40695$
31/12/2017	As per GAAP, Available for Sale securities are revalued at their fair values at each year end dates. This revaluation is done either by debiting Unrealised Gain/Loss- Other Comprehensive Income (OCI) A/c in case of decrease in value of the securities and vice versa. The calculations are as shown below: a) Johnsons & Johnsons Stock: Fair value per stock = $21.50 So, Total value of 1000 shares = $1000*21.50=\$21500$. Book Value = $20740. So Unrealised Gain on Johnsons & Johnsons= $\$\left(21500-20740\right)=\$760$ b) Sony Stock: Fair Value per stock = $38 So, Total Value of 1200 shares of Sony = $1200*38=\$45600$ Book Value = $55665 So, Unrealised Loss on Sony = $\$\left(45600-55665\right)=\$10065$ C) Mattel Stock: Fair Value per stock= $30.90 So total value of 1500 shares of Mattel= $1500*30.90=\$46350$ Book Value = $40695 So, Unrealised Gain on Mattel= $\$\left(46350-40695\right)=\$5655$ So Net Unrealized Gain/Loss $=a+c-b=\$\left(760+5655-10065\right)=-\$3650$
15/04/2018	Since Cash is received on sale, Cash a/c is debited. Amount= $\left(1000*23.50\right)-525=\$22975$ Unrealized Gain on Johnsons & Johnsons = $760 is debited as per GAAP. Last updated fair value of Investment- Long Term Available for Sale Securities A/c (Johnsons & Johnsons) = $21500 is credited on sale of investment. Balance figure $=\$\left(22975+760-21500\right)=\$2235$ is the realized gain and it is credited.
05/07/2018	Since Cash is received on sale, Cash a/c is debited. Amount= $\left(1500*23.90\right)-235=\$35615$ Unrealized Gain on Mattel = $5655 is debited as per GAAP. Last updated fair value of Investment- Long Term Available for Sale Securities A/c (Mattel) = $46350 is credited on sale of investment. Balance figure $=\$\left(35615+5655-46350\right)=\$5080$ is the realized loss and it is debited
22/07/2018	Since Investment in long term Available for sale securities has been purchased it has been debited and since cash has been paid it has been credited. Fees and commission paid on purchase of securities are included in the value of the said securities. The calculation of value is as shown: $\left(600*22.50\right)+480=\$13980$
19/08/2018	Since Investment in long term Available for sale securities has been purchased it has been debited and since cash has been paid it has been credited. Fees and commission paid on purchase of securities are included in the value of the said securities. The calculation of value is as shown: $\left(900*17\right)+198=\$15498$
31/12/2018	As per GAAP, Available for Sale securities are revalued at their fair values at each year end dates. This revaluation is done either by debiting Unrealised Gain/Loss- Other Comprehensive Income (OCI) A/c in case of decrease in value of the securities and vice versa. The calculations are as shown below: a) Kodak Stock: Fair value per stock = $19.25 So, Total value of 900 shares = $900*19.25=\$17325.$ Book Value = $15498. So Unrealised Gain on Kodak= $\$\left(17325-15498\right)=\$1827$ b) Sony Stock: Fair Value per stock = $35 So, Total Value of 1200 shares of Sony = $1200*35=\$42000$ Book Value = $45600 So, Unrealised Loss on Sony $=\$\left(42000-45600\right)=-\$3600$ C) Sara Lee Stock: Fair Value per stock= $20 So total value of 600 shares of Sara Lee $=600*20=\$12000$ Book Value = $13980 So, Unrealised Loss on Sara Lee $=\$\left(12000-13980\right)=-\$1980$ So Net Unrealized Gain/Loss= $a–b-c=\$\left(1827-3600-1980\right)=-\$3753$
27/02/2019	Since Investment in long term Available for sale securities has been purchased it has been debited and since cash has been paid it has been credited. Fees and commission paid on purchase of securities are included in the value of the said securities. The calculation of value is as shown: $\left(2400*67\right)+525=\$161325$
21/06/2019	Since Cash is received on sale, Cash a/c is debited. Amount $=\left(1200*48\right)-880=\$56720$ Unrealised Loss on Sony = $\$\left(10065+3600\right)=\$13665$ is credited as per GAAP. Last updated fair value of Investment- Long Term Available for Sale Securities A/c (Sony) = $42000 is credited on sale of investment. Balance figure $=\$\left(56720-42000-13665\right)=\$1055$ is the realized gain and it is credited
30/06/2019	Since Investment in long term Available for sale securities has been purchased it has been debited and since cash has been paid it has been credited. Fees and commission paid on purchase of securities are included in the value of the said securities. The calculation of value is as shown: $\left(1400*36\right)+435=\$50835$
03/08/2019	Since Cash is received on sale, Cash a/c is debited. Amount= $\left(600*16.25\right)-435=\$9315$ Unrealized Loss on Sara Lee = $1980 is credited as per GAAP. Last updated fair value of Investment- Long Term Available for Sale Securities A/c (Sara Lee) = $12000 is credited on sale of investment. Balance figure $=\$\left(9315-1980-12000\right)=\$4665$ is the realized loss and it is debited
01/11/2019	Since Cash is received on sale, Cash a/c is debited. Amount= $\left(900*22.75\right)-625=\$19850$ Unrealized Gain on Eastman Kodak= $1827 is debited as per GAAP. Last updated fair value of Investment- Long Term Available for Sale Securities A/c (Eastman Kodak) = $17325 is credited on sale of investment. Balance figure = $\$\left(19850+1827-17325\right)=\$4352$ is the realized gain and it is credited
31/12/2019	As per GAAP, Available for Sale securities are revalued at their fair values at each year end dates. This revaluation is done either by debiting Unrealised Gain/Loss- Other Comprehensive Income (OCI) A/c in case of decrease in value of the securities and vice versa. The calculations are as shown below: a) Microsoft Stock: Fair value per stock = $69.00 So, Total value of 2400 shares = $2400*69.00=\$165600$ Book Value = $161325. So Unrealised Gain on Microsoft $=\$\left(165600-161325\right)=\$4275$ b) Black & Decker Stock: Fair Value per stock = $39.00 So, Total Value of 1400 shares of Black & Decker $=1400*39=\$54600$ Book Value = $50835 So, Unrealised Gain on Black & Decker $=\$\left(54600-50835\right)=\$3765$ So, Net unrealized gain $=a+b=4275+3765=\$8040$

To determine

2.

Introduction:

Total Cost means the cost incurred to acquire the securities and includes fees and commission paid on such acquisition.

Fair value adjustment means the adjustments to be made in the fair value of the Available for sale securities as at the end of the year as required by the GAAP.

Total Fair value of Portfolio =(Total Cost-Fair value adjustment)

To Prepare:

A table that summarises the (a) Total Cost, (b) Total fair value adjustment, and (c) Total fair value of the portfolio of long-term available-for-sale securities at each year-end. i.e. 2017, 2018, 2019.

Answer to Problem 3APSA

Solution:

GRASS SECURITY
PARTICULARS	2017	2018	2019
(a) Total Cost
Johnsons & Johnsons	20740	-	-
Sony	55665	55665	-
Mattel	40695	-	-
Sara Lee	-	13980	-
Eastman Kodak	-	15498	-
Microsoft	-	-	161325
Black & Decker	-	-	50835
Total (a)	117100	85143	212160
(b) Total Fair value Adjustment
Johnsons & Johnsons	760	-	-
Sony	-10065	-13665	-
Mattel	5655	-	-
Sara Lee	-	-1980	-
Eastman Kodak	-	1827	-
Microsoft	-	-	4275
Black & Decker	-	-	3765
Total (b)	-3650	-13818	8040
(C) Total fair value of the portfolio of long-term available-for-sale securities:
Total Cost (a)	117100	85143	212160
Less: Fair Value Adjustment	-3650	-13818	8040
Total(c)	113450	71325	220200

Explanation of Solution

1. Total Cost of a security remains the same as was incurred at the time of its acquisition. The shares that have been sold during the year have not been included in total cost for that year.

2. Fair Value Adjustments are the adjustments made to the total cost of a security.

Example: Total Cost of Johnsons & Johnsons stock $ 20740. Fair value as at the end of 2017 = $21500. So Fair value adjustment = $(21500-20740) = $760 i.e. increase in the value of investment.

3. Total fair value of portfolio is the total cost of portfolio as reduced by the fair value adjustments. Calculations are made as above.

To determine

3.

Introduction:

As per GAAP, Available for Sale securities are revalued at their fair values at each year end dates. This revaluation is done either by debiting Unrealised Gain/Loss- Other Comprehensive Income (OCI) A/c in case of decrease in value of the securities or by crediting Unrealised Gain/Loss- Other Comprehensive Income (OCI) A/c in case of increase in value of securities.

Realised gain on Available for sale securities is the excess of cash proceeds received on sale of the security as reduced by the fair value of the security net of Unrealised Gain/Loss on the same.

On the other hand, Realized loss is the excess of fair value of the security net of Unrealised Gain/Loss as reduced by cash proceeds received on sale of the same.

To Prepare:

A table that summarises (a) Realised gains and losses and (b) unrealized gains or losses for the portfolio of long-term available-for-sale securities at the end of each year.

Answer to Problem 3APSA

Solution:

GRASS SECURITY
PARTICULARS	2017	2018	2019
(a) Realized Gains and losses:
Johnsons & Johnsons	-	2235	-
Sony	-	-	1055
Mattel	-	-5080	-
Sara Lee	-	-	-4665
Eastman Kodak	-	-	4352
Microsoft	-	-	-
Black & Decker	-	-	-
Total	-	-2845	742
(b) Unrealized Gains and Losses:
Johnsons & Johnsons	760	-	-
Sony	-10065	-13665	-
Mattel	5655	-	-
Sara Lee	-	-1980	-
Eastman Kodak	-	1827	-
Microsoft	-	-	4275
Black & Decker	-	-	3765
Total	-3650	13818	8040

Explanation of Solution

1. Realized gains and losses for the investments arise when the investments are sold. These are computed as below:

Stock	Total Cost	Total Fair value adjustments	Sale Proceeds	Realized Gain/Loss
Johnsons & Johnsons	20740	760	22975	2235
Sony	55665	-13665	56720	1055
Mattel	40695	5655	35615	-5080
Sara Lee	13980	-1980	9315	-4665
Eastman Kodak	15498	1827	19850	4352
Microsoft*	161325	4275	-	-
Black & Decker*	50835	3765	-	-

*Microsoft and Black & Decker have not been sold; hence no realized gains/loss arises.

2. Unrealized Gains/Losses for investments are same as the fair value adjustments made to individual stocks.