Financial Accounting
3rd Edition
ISBN: 9780133791129
Author: Jane L. Reimers
Publisher: Pearson Higher Ed
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Textbook Question
Chapter 10B, Problem 1YT
A corporation has invested $50,000 in the securities of other companies. At the end of the year, that corporation’s portfolio has a market value of $52,000. Describe where these securities would be shown on the annual financial statements and at what amount under each of the conditions described.
- 1. The investment is classified as trading securities.
- 2. The investment is classified as available for sale.
- 3. The investment is classified as held to maturity.
Expert Solution & Answer
To determine
Explain that where the given securities would be shown on the annual financial statements and state the amount under each of the conditions explained.
Explanation of Solution
Situation 1:
In this situation, the securities will be shown in the current asset section of the balance sheet at a value of $52,000. The write-up will be balanced with a $2,000 unrealized gain on the income statement.
Situation 2:
In this situation, the securities will be shown depending on a company’s intent, either the current asset or the long-term asset section of the balance sheet at a value of $52,000. The write-up will be balanced with a $2,000 unrealized gain that will go directly to equity, as part of accumulated other comprehensive income.
Situation 3:
In this situation, the securities will be shown at their cost of $50,000 in the long-term asset section of the balance sheet (except the debt securities are maturing in the next year, in which case they would be reported under the current assets).
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Ticker Services began operations in Year 1 and holds long-term investments in available-for-sale debt securities. The year-end cost and fair values for its portfolio of these investments follow.
Portfolio of Available-for-Sale Securities
December 31, Year 1
December 31, Year 2
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20,000
23,000
16,500
December 31, Year 3
December 31, Year 4
Complete this question by entering your answers in the tabs below.
Prepare journal entries to record each year-end fair value adjustment for these securities.
Adjustment General Journal
Calculation
Calculation adjustment required to fair value adjustment.
12/31/Year 1 Existing balance in Fair Value Adjustment-AFS (LT)
Required balance in Fair Value Adjustment-AFS (LT)
Adjustment required to Fair Value Adjustment-AFS (LT)
12/31/Year 2 Existing balance in Fair Value Adjustment-AFS (LT)
Required balance in Fair Value Adjustment-AFS (LT)
Adjustment required to Fair Value Adjustment-AFS (LT)
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At December 31, 2021, Hull-Meyers Corp. had the following investments that were purchased during 2021, its first year of operations:
Trading Securities:
Security A
Security B
Totals
Securities Available-for-Sale:
Security C
Security D
Totals
Securities to Be Held-to-Maturity:
Security E
Security F
Totals
Trading Securities
Security A
Security B
Securities Available-for-Sale
Security C
Security D
Securities to be Held-to-Maturity
Security E
Security F
Totals
Amortized cost
Reported on Balance Sheet
as:
Current assets
$ 905,000
110,000
$1,015,000
Noncurrent
assets
$ 705,000
905,000
$1,610,000
$ 495,000
620,000
$1,115,000
No investments were sold during 2021. All securities except Security D and Security F are considered short-term investments. None of
the fair value changes is considered permanent.
Required:
Complete the following table. (Amounts to be deducted should be indicated with a minus sign.)
Fair Value
$915,500
104,900
$1,020,400
$ 784,500
920, 200
$1,704,700
Net Income
(I/S)
$…
Indicate where each of the following items 1 through 5 is reported on financial statements.
1. Unrealized gain on available-for-sale securities
2. Held-to-maturity securities (due in 15 years)
3. Loss on sale of debt indestments
4. Fair Value Adjustment-Stock (Short term)
5. Unrealized gain on trading securities
Equity
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