Chapter 15, Problem 3BPSB

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 3BPSB

Solution:

Serial No.	Date	Particulars	Debit ($)	Credit ($)
1	10/03/2017	Investment- Long Term Available for Sale Securities A/c	31400
		Cash A/c		31400
		(Being purchased 1200 shares of Apple @ $25.50 per share plus $800 commission)
2	07/04/2017	Investment- Long Term Available for Sale Securities A/c	57283
		Cash A/c		57283
		(Being purchased 2500 shares of Ford @ $22.50 per share plus $1033 commission)
3	01/09/2017	Investment- Long Term Available for Sale Securities A/c	29090
		Cash A/c		29090
		(Being purchased 600 shares of Polaroid @ $47.00 per share plus $890 commission)
4	31/12/2017	Unrealised Gain/Loss-Other Comprehensive Income A/c	2873
		Investment- Long Term Available for Sale Securities A/c		2873
		(Being Unrealised Loss on revaluation of Investment- Long Term Available for Sale Securities A/c recognized)
5	26/04/2018	Cash A/c	50043
		Realised Loss on Available for Sale Securities A/c	7240
		Investment- Long Term Available for Sale Securities A/c		52500
		Unrealised Gain/Loss-Other Comprehensive Income A/c		4783
		(Being Sold 2500 shares of Ford at $20.50 less $1207 commission and loss accounted for)
6	02/06/2018	Investment- Long Term Available for Sale Securities A/c	35700
		Cash A/c		35700
		(Being purchased 1800 shares of Duracell @ $19.25 per share plus $1050 commission)
7	14/06/2018	Investment- Long Term Available for Sale Securities A/c	25480
		Cash A/c		25480
		(Being purchased 1200 shares of Sears @ $21.00 per share plus $280 commission)
8	27/11/2018	Cash A/c	29755
		Unrealised Gain/Loss-Other Comprehensive Income A/c	310
		Investment- Long Term Available for Sale Securities A/c		29400
		Realised Gain on Available for Sale Securities A/c		665
		(Being Sold 600 shares of Polaroid at $51.00 less $845 commission and gain accounted for)
9	31/12/2018	Investment- Long Term Available for Sale Securities A/c	620
		Unrealised Gain/Loss-Other Comprehensive Income A/c		620
		(Being Unrealised Gain on revaluation of Investment- Long Term Available for Sale Securities A/c recognized)
10	28/01/2019	Investment- Long Term Available for Sale Securities A/c	41480
		Cash A/c		41480
		(Being purchased 1000 shares of Coca Cola@ $40.00 per share plus $1480 commission)
11	22/08/2019	Cash A/c	23950
		Realised loss on Available for Sale Securities A/c	7450
		Unrealised Gain/Loss-Other Comprehensive Income A/c	3400
		Investment- Long Term Available for Sale Securities A/c		34800
		(Being Sold 1200 shares of Apple at $21.50 per share less $1850 commission and realized loss accounted for)
12	03/09/2019	Investment- Long Term Available for Sale Securities A/c	84780
		Cash A/c		84780
		(Being purchased 3000 shares of Motorola@ $28.00 per share plus $780 commission)
13	09/10/2019	Cash A/c	28201
		Unrealised Gain/Loss-Other Comprehensive Income A/c	2120
		Investment- Long Term Available for Sale Securities A/c		27600
		Realised gain on Available for Sale Securities A/c		2721
		(Being Sold 1200 shares of Sears at $24.00 per share less $599 commission and gain accounted for)
14	31/10/2019	Cash A/c	26102
		Realised loss on Available for Sale Securities A/c	4352
		Unrealised Gain/Loss-Other Comprehensive Income A/c		3300
		Investment- Long Term Available for Sale Securities A/c		32400
		(Being Sold 1800 shares of Duracell at $15.00 per share less $898 commission and loss accounted for)
15	31/12/2019	Unrealised Gain/Loss-Other Comprehensive Income A/c	6260
		Investment- Long Term Available for Sale Securities A/c		6260
		(Being Unrealised Loss 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
10/03/2017	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: $\left(1200*25.50\right)+800=31400$
07/04/2017	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: $\left(2500*22.50\right)+1033=57283$
01/09/2017	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: $\left(600*47\right)+890=29090$
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) Apple Stock: Fair value per stock = $27.50 So, Total value of 1200 shares $=1200*27.50=\$33000$. Book Value = $31400. So Unrealised Gain on Apple $=\$\left(33000-31400\right)=\$1600$ b) Ford Stock: Fair Value per stock = $21.00 So, Total Value of 2500 shares of Ford $=2500*21=\$52500$ Book Value = $57283 So, Unrealised Loss on Ford $=\$\left(52500-57283\right)=-\$4783$ C) Polaroid Stock: Fair Value per stock= $49.00 So total value of 600 shares of Polaroid= 600*49 = $ 29400 Book Value = $29090 So, Unrealised Gain on Polaroid $=\$\left(29400-29090\right)=\$310$ So Net Unrealised Gain/Loss $=a+c-b=\$\left(1600+310-4783\right)=-\$2873$
26/04/2018	Since Cash is received on sale, Cash a/c is debited. Amount $=\left(2500*20.50\right)-1207=\$50043$ Unrealised Loss on Ford = -$4783is credited as per GAAP. Last updated fair value of Investment- Long Term Available for Sale Securities A/c (Ford) = $52500 is credited on sale of investment. Balance figure $=\$\left(50043-4783-52500\right)=-\$7240$ is the realized loss and it is debited.
02/06/2018	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: $\left(1800*19.25\right)+1050=\$35700$
14/06/2018	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: $\left(1200*21\right)+280=\$25480$
27/11/2018	Since Cash is received on sale, Cash a/c is debited. Amount $=\left(600*51.00\right)-845=\$29755$ Unrealised Gain on Polaroid= $310 is debited as per GAAP. Last updated fair value of Investment- Long Term Available for Sale Securities A/c (Polaroid) = $29400 is credited on sale of investment. Balance figure $=\$\left(29755+310-29400\right)=\$665$ is the realized gain and it is credited
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) Apple Stock: Fair value per stock = $29.00 So, Total value of 1200 shares $=1200*29.00=\$34800$. Book Value = $33000. So Unrealised Gain on Apple $=\$\left(34800-33000\right)=\$1800$ b) Duracell Stock: Fair Value per stock = $18.00 So, Total Value of 1200 shares of Duracell $=1800*18=\$32400$ Book Value = $35700 So, Unrealised Loss on Duracell $=\$\left(32400-35700\right)=-\$3300$ C) Sears Stock: Fair Value per stock= $23.00 So total value of 600 shares of Sears $=1200*23=\$27600$ Book Value = $25480 So, Unrealised Gain on Sears = $\$\left(27600-25480\right)=\$2120$ So Net Unrealised Gain/Loss= $a–b+c=\$\left(1800-3300+2120\right)=\$620$
28/01/2019	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: $\left(1000*40\right)+1480=\$41480$
22/08/2019	Since Cash is received on sale, Cash a/c is debited. Amount $=\left(1200*21.50\right)-1850=\$23950$ Unrealised Gain on Apple $=\$\left(1600+1800\right)=\$3400$ is debited as per GAAP. Last updated fair value of Investment- Long Term Available for Sale Securities A/c (Apple) = $34800 is credited on sale of investment. Balance figure $=\$\left(23950+3400-34800\right)=-\$7450$ is the realized loss and it is debited.
03/09/2019	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: (3000*28.00)+780= $84780
09/10/2019	Since Cash is received on sale, Cash a/c is debited. Amount $=\left(1200*24.00\right)-599=\$28201$ Unrealised Gain on Sears = $2120 is debited as per GAAP. Last updated fair value of Investment- Long Term Available for Sale Securities A/c (Sears) = $27600 is credited on sale of investment. Balance figure $=\$\left(28201+2120-27600\right)=\$2721$ is the realized gain and it is credited.
31/10/2019	Since Cash is received on sale, Cash a/c is debited. Amount= $\left(1800*15.00\right)-898=\$26102$ Unrealised Loss on Duracell= -$3300 is credited as per GAAP. Last updated fair value of Investment- Long Term Available for Sale Securities A/c (Duracell) = $32400 is credited on sale of investment. Balance figure = $\$\left(26102-3300-32400\right)=-\$4352$ is the realized loss and it is debited
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) Coca-Cola Stock: Fair value per stock = $48.00 So, Total value of 1000 shares = $1000*48.00=\$48000$. Book Value = $41480. So Unrealised Gain on Coca-Cola $=\$\left(48000-41480\right)=\$6520$ b) Motorola Stock: Fair Value per stock = $24.00 So, Total Value of 3000 shares of Motorola = $3000*24=\$72000$ Book Value = $84780 So, Unrealised Loss on Motorola $=\$\left(72000-84780\right)=-\$12780$ So, Net unrealized loss $=a-b=6520-12780=-\$6260$

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 3BPSB

Solution:

GRASS SECURITY
PARTICULARS	2017	2018	2019
(a) Total Cost
Apple	31400	31400	-
Ford	57283	-	-
Polaroid	29090	-	-
Duracell	-	35700	-
Sears	-	25480	-
Coca-Cola	-	-	41480
Motorola	-	-	84780
Total (a)	117773	61180	126260
(b) Total Fair value Adjustment
Apple	1600	3400	-
Ford	-4783	-	-
Polaroid	310	-	-
Duracell	-	-3300	-
Sears	-	2120	-
Coca-Cola	-	-	6520
Motorola	-	-	-12780
Total (b)	-2873	2220	-6260
(C) Total fair value of the portfolio of long-term available-for-sale securities:
Total Cost (a)	117773	61180	126260
Less: Fair Value Adjustment	-2873	2220	-6260
Total(c)	114900	63400	120000

Explanation of Solution

Explanation

The total fair value adjustment for each stock has been calculated in part 1.

Conclusion

The fair value of the portfolio has been computed by subtracting the fair value adjustments from the total costs.

3.

To determine

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 Unrealized 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.

Realized 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, Realised 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 3BPSB

Solution:

GRASS SECURITY
PARTICULARS	2017	2018	2019
(a) Realised Gains and losses:
Apple	-	-	-7450
Ford	-	-7240	-
Polaroid	-	665	-
Duracell	-	-	-4352
Sears	-	-	2721
Coca-Cola	-	-	-
Motorola	-	-	-
Total	-	-6575	-9081
(b) Unrealised Gains and Losses:
Apple	1600	3400	-
Ford	-4783	-	-
Polaroid	310	-	-
Duracell	-	-3300	-
Sears	-	2120	-
Coca-Cola	-	-	6520
Motorola	-	-	-12780
Total	-2873	2220	-6260

Explanation of Solution

Explanation

The realized and unreaslised gains on each stock has been calculated in part 1.