Explanation Available-for-sale (AFS) securities: The category of passive investments which are held as idle funds to serve the future operating and strategic purposes, are referred to as available-for-sale securities. The percentage of passive investments in debt or equity will be less than 20%. Journal entry : Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically. Debit and credit rules: Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts. Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts. Prepare journal entry for purchase of investment in AFS securities . Date Account Titles and Explanation Post Ref. Debit ($) Credit ($) 2015 March 10 Investments in AFS Securities 525,000 Cash 525,000 (To record investment in AFSS) Table (1) Description: Investments in AFS Securities is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited. Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited. Working Notes: Compute cost of investment in AFS securities. Cost of investment = Number of shares × Price per share = 15 , 00 0 shares × $35 per share = $ 525 , 000 (1) Prepare journal entry for adjusting the cost of AFS securities to the fair market value, as on December 31, 2015 . Date Account Titles and Explanation Post Ref. Debit ($) Credit ($) 2015 December 31 Net Unrealized Gains (Losses) 30,000 Investments in AFS Securities 30,000 (To record the adjustment of cost of investment in AFS to the fair value) Table (2) Description: Net Unrealized Gains (Losses) is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, a decrease in stockholders’ equity value is debited. This loss is reported as component of Other Comprehensive Income (OCI) on the Statement of Comprehensive Income. Investments in AFS Securities is an asset account. The account is credited because the market price was decreased, and eventually the asset value decreased. Working Notes: Determine the unrealized gain or loss on investment on December 31, 2015. Step 1: Compute the fair value of investment on December 31, 2015. Fair value = Number of shares×Market price per share = 15,000 shares × $33 per share = $495,000 (2) Step 2: Compute unrealized gain or loss on investment in AFS securities. Unrealized gain or ( loss ) } = { Fair value of investment on December 31, 2015 – Cost of investment on March 10, 2015 } =$495,000–$525,000 =$ ( 30,000 ) Note: Refer to Equations (2) and (1) for both the values. Prepare journal entry for adjusting the cost of AFS securities to the fair market value, as on December 31, 2016 . Date Account Titles and Explanation Post Ref. Debit ($) Credit ($) 2016 December 31 Investments in AFS Securities 45,000 Net Unrealized Gains (Losses) 45,000 (To record the adjustment of cost of investment in AFS to the fair value) Table (3) Description: Investments in AFS Securities is an asset account. The account is debited because the market price was increased, and eventually the asset value increased. Net Unrealized Gains (Losses) is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, an increase in stockholders’ equity value is credited. This gain is reported as component of Other Comprehensive Income (OCI) on the Statement of Comprehensive Income. Working Notes: Determine the unrealized gain or loss on investment in AFS securities. Step 1: Compute the fair value of investment on December 31, 2016. Fair value = Number of shares×Market price per share = 15,000 shares × $36 per share = $540,000 (3) Step 2: Compute unrealized gain or loss on investment in AFS securities. Unrealized gain or ( loss ) } = { Fair value of investment on December 31, 2016 – Fair value of investment on December 31, 2015 } =$540,000–$495,000 =$45,000 Note: Refer to Equations (3) and (2) for both the values

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ISBN: 9781308821672

Author: Libby

Publisher: MCG/CREATE

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Solution Summary: The author explains that journal entry is a set of economic events which can be measured in monetary terms.

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