ACCT.

3021 HW 12b
Q 12 1
Classified as HTM, TS and AFS securities.
Q 12 5
All unrealized holding gains and losses are reported by its classification
ST or AFS on financial statements. AFS reported in Comprehensive
Income statement included in Other Comprehensive Income (OCI) and
also AFS always at their fair value.
Q 12 6
Comprehensive incomes is a statement of all income and expenses
recognized during that period. It is illustrates the financial performance
and results of operations. Unrealized holding gains and losses from
available for sale are included in the other comprehensive income.
These items are not part of net income but it is really important to be
included in comprehensive income, because it gives more details about
the company for the users.
BE 12-2
S&L Financial.
In 2013 S&L Financial will report loss of $ 2,000, because FV of these
stocks were $ 873,000 but S&L Financial purchased them for $
875,000. Unrealized holding gains and losses would be recorded on
Income Statement.
JOURNAL ENTRY DEC. 27, 2013.
Investments in COCA COLA TS

DEBIT
$
875,000

Cash

ADJUSTING ENTRY DEC. 31 2013

Net unrealized loss on TS Income
statement
FV Adjustment TS
($875,000 - $873,00)
=

CREDIT
$
875,000

DEBIT
$ 2,000

CREDIT
$ 2,000

For 2014 S&L Financial will report gain of $5,000 on investments and
$2,000 of unrealized holding gains, because S&L Financial on January
3, 2014 sold the shares for $ 880,000 ($880,000 - $875,000 FV) =
$5,000. Journal entries for these transactions would be.
JOURNAL ENTRY JANUARY 03, 2014.
Cash (it is the selling price of the shares)

DEBIT
$
880,000

CREDIT

ACCT. 3021 HW 12b

Gain on Investments
Investment in COCA COLA TS

$ 5,000
$
875,000

ADJUSTING ENTRY DEC. 31 2014.

DEBIT
CREDIT
FV Adjustment TS
$ 2,000
($875,000 - $873,00)
=
Net unrealized gain on TS Income
$ 2,000
statement.
BE 12 3
S&L Financial.
In comprehensive income as other comprehensive income S&L will
report $2,000 holding loss for 2013 FV adjustment: $875,000 $873,000 = $2000*. And in 2014 when fair value will reach $880,000
company will record $ 5,000** =($880,000 - $875,000) gain because
securities were sold.
JOURNAL ENTRY DEC. 27, 2013
Investment in Coca Cola
Cash

DEBIT
$875,000

ADJUSTING ENTRY DEC 31, 2013

Net unrealized holding loss OCI
FV adjustment

DEBIT
$2,000*

JOURNAL ENTRY JANUARY 3, 2014

Cash
Investment in Coca Cola (Dec. 27,2014)
Gain on investments

CREDIT
$875,000

CREDIT
$2,000*

DEBIT
$880,000

CREDIT
$875,000
$5,000**

ADJUSTING ENTRY DEC 31, 2014

DEBIT
CREDIT
FV adjustment
$2,000*
Net unrealized holding gains and losses
$2,000*
OCI
BE 12 4
As we now from the book that securities AFS are reported at their FV,
and unrealized holding gains and losses are reported in the
comprehensive statement as OCI.

ACCT. 3021 HW 12b

Cash - $500,000
FV last year - $610,000
FV this year - $670,000
FV adjustment: $670,000 - $610,000 = $60,000*
JOURNAL ENTRY
DEBIT
CREDIT
FV adjustment
$60,000*
Unrealized holding gains and losses
$60,000*
OCI
BE 12 5
These securities are AFS, and as we remember they are reported in
their fair value on comprehensive income as OCI which is $4,000,000 =
40,000 shares x $100. Therefore we will report $4,000,000 in 2013`
balance sheet. They cannot be classified as TS, because TS securities
are acquires for the purpose of selling them in near term. As we know
from the exercise shares for the FedEx were hold for more than a year,
for that reason they cannot be classified as TS. Also these securities
are not HTM because investor does not have the positive intent and
ability to hold to maturity.
BE 12 -6
S&L Financial.
S&L Financial will classify this investments as trading security because
in the exercise it says that company choose the fair value option. Then,
all the transactions related to these investments will be held as trading
securities. So, for that reason S&L Financial will report $ 2,000 loss in
2013 and $5,000 gain in 2014. Journal entries for these transactions
will look like this:
JOURNAL ENTRY DEC. 27, 2013
Investment in COCA COLA
Cash

DEBIT
$875,000

CREDIT
$875,000

ADJUSTING ENTRY DEC. 31, 2013

DEBIT
Unrealized holding loss Income
$2,000*
Statement
FV adjustment
FV adjustment: $875,000 - $873,000 = $2000*.

CREDIT

JOURNAL ENTRY JANUARY 3, 2014

Cash
Investment in COCA COLA
Gain on investments

CREDIT

DEBIT
$880,000

$2,000*

$875,000
$5,000

ACCT. 3021 HW 12b

ADJUSTING ENTRY DEC. 31, 2014

FV adjustment
Unrealized holding gains and loss
Income
Statement

DEBIT
$2,000

CREDIT
$2,000

BE 12 7
In this exercise Turner Company will report $500,000 as investment
revenue on their Income statement, because Turner Company owns
10% outstanding stock of ICA and ICA paid $5 million cash dividend to
their common stock holders this year ($5 million x 10% = $500,000).
Therefore, Turner Company does not have significant influence over
the company for that reason equity method cannot be used.

E 12 4
Shott Farm Supplies Corporation.
Investments in General Motors were $41,200 = 800 shares x $50(paid
price for each shares)+$1,200 (brokerage fee). After two months
shares were sold for $53 per share and also brokerage fee was paid
therefore, $41,100 = 800 x $53 - $1,300. We can see here that we
have $100 loss when shares were sold. Journal entries for these
transactions would be:
JOURNAL ENTRY BUY
Investment in General Motors
Cash

DEBIT
$41,200

CREDIT
$41,200

After two months:

JOURNAL ENTRY SELL
Cash
Loss on sale of investments
Investment in General Motors
E 12 5
Rantzow Lear Company.
1)
DATE

JOURNAL ENTRIES AND

ADJUSTMENTS FOR DECEMBER

DEBIT
$ 41,100
$100

CREDIT
$41,200

DEBIT

CREDIT

ACCT. 3021 HW 12b

12/17/1
3
12/28/1
3

2013 BUY
Investment in Grocers` Supply
Corporation preferred shares
($350,000/100,000 shares =$3.5 per
share)
Cash
Cash dividends

Dividend Revenue
12/31/1 FV Adjustment ($4 x 100, 000
3
shares=$400,000)
Net unrealized holding gain Income
statement
Market price of the stock = $4 per share.
$400,000 - $350,000 = $50,000*
DATE
01/05/1
4
12/31/1
4

JOURNAL ENTRIES AND

ADJUSTMENTS FOR 2014 SELL
Cash
Investment in Grocers` Supply
Gain on Investments
Net unrealized holding Loss
Income Statement
FV adjustments

$350,00
0
$350,000
$2,000
$2,000
$50,000
*
$50,000*

DEBIT

CREDIT

$395,000
$350,000
$45,000
$50,000
$50,000

2)
Rantzow Lear Company`s BALANCE SHEET for 2013
Assets:
Trading Securities at FV
$400,000

INCOME STATEMENT
Dividends

$2,000

Realized and unrealized gains and losses on

investments

$50,000*

ACCT. 3021 HW 12b

E 12 7
1)
ADJUSTING ENTRY DEC. 31, 2013
DEBIT
CREDIT
Unrealized holding loss on AFS - OCI
$25,000*
FV adjustment
$25,000*
FV adjustment: $45,000(short term) - $20,000(long term) = $25,000*

Requirement 2
None. Accumulated net holding gains and losses for securities
available-for-sale are reported as a component of shareholders equity (in
accumulated other comprehensive income), and changes in the balance are
reported as other comprehensive income or loss in the statement of
comprehensive income rather than as part of earnings. This statement can be
reported either (a) as a combined statement of comprehensive income that
includes net income and other comprehensive income, or (b) as a separate
statement of comprehensive income.
E 12 8
1)
Classification of these IBM shares is AFS. They cannot be classified as
HTM, because investor does not have the positive intent and ability
to hold to maturity, also they cannot be TS, because these investments
were not acquired to sell them in the near term. As we know from the
book that investments in securities available-for-sale should be
reported at their fair value and unrealized holding gains and losses are
reported as other comprehensive income in the comprehensive income
statement. Also, one important thing to mention is that this statement
can be reported as a combined or separate statement of
comprehensive income.
2)
ADJUSTING ENTRY DEC. 31, 2013
DEBIT
CREDIT
Unrealized holding loss on AFS - OCI
$20,000*
FV adjustment
$20,000*
10,000 shares x $58(market value per share) = $580,000
10,000 shares x $60(common stock per share) = $600,000
Therefore: $580,000 - $600,000 = -$20,000* loss

ACCT. 3021 HW 12b

3)
ADJUSTING ENTRY DEC. 31, 2014
DEBIT
CREDIT
FV adjustment
$30,000*
Unrealized holding gains on AFS $30,000*
OCI
10,000 shares x $61(market value per share) = $610,000
10,000 shares x $58(common stock per share) = $580,000
Therefore: $610,000 - $580,000 = $30,000*
E 12 12
1)
ADJUSTING ENTRY DEC. 31, 2013
DEBIT
Net unrealized holding gains and losses $25,000*
- OCI
FV adjustment
FV adjustment: $1,175 $1,200 = $25,000*

CREDIT
$25,000*

2)
ADJUSTING ENTRY DEC. 31, 2013
DEBIT
FV adjustment
$75,000**
Net unrealized holding gains and
losses - OCI
FV adjustment: $1,275 $1,200 = $75,000**

CREDIT
$75,000**

3)
ADJUSTING ENTRY DEC. 31, 2013
DEBIT
FV adjustment
$175,000***
Net unrealized holding gains and
losses - OCI
FV adjustment: $1,375 $1,200 = $175,000**

CREDIT
$175,000***

P 12 2
Fuzzy Monkey Technologies, Inc.,
1)
JOURNAL ENTRY JANUARY 1, 2013
Investment in Bonds
Discount on bonds Investment
Cash (price paid for the bonds)

DEBIT
$ 80 million

CREDIT
$ 14 million
$ 66 million

ACCT. 3021 HW 12b

2)
Outstanding Balance

Effective rate

Effective Interest

$ 80 million
4%*
=
$3.2 million
x
*Interest paid semiannually then: one-half the market rate would be
8%/2 = 4%
JOURNAL ENTRY JUN 30,
2013
Cash
Discount on bond Investment
Interest Revenue (5% x $
66M)

CREDIT

DEBIT

$3.2 million
$0.1 million*
$3.30 million

3)
JOURNAL ENTRY DEC. 31,
2013
Cash
Discount on bond investment
Interest Revenue (5% x
$66.1M)
DATE

06/30/1
3
12/31/1
3

DEBIT

CREDIT

$3.2million
$0.105million**

CASH
EFFECTIVE
INTEREST INTEREST
($80M x
4%)=$3.
2M
$3.2M
5% x
($66M)=$3.3M
$ 3.2M
5% x
($66.1M)=$3.30
5M

$3.305 million

INCREASE IN
BALANCE

OUTSTANDING
BALANCE

$3.3M - $3.2M=$
0.1M*

$66M+
$0.1M=$66.1M

$3.305M - $3.2M=$ $66.1M+

0.105M**
$0.105M=$66.2
05M

4)
Fuzzy Monkey will report fair value of its investment $70 million in the

ACCT. 3021 HW 12b

balance sheet on Dec 31, 2013. Also we need to find the amortized
cost of the investment at the end of the year.
BALANCE SHEET AS OF DECEMBER 31, 2013
Investment in bonds
Less: Discount on bond investment ($14 $0.1 $0.105)
Book Value (amortized cost)

$ 80 million
$13.795
$ 66.205

To do the fair value adjustment we need to deduct the amortized cost

from the fair value ($70 66.205) = $3.795 (unrealized gain), and
unrealized gain in TS investments would be recorded in the Income
statement, not in the balance sheet. Therefore,
ADJUSTMENT ENTRY DEC 31, 2013
FV adjustment

DEBIT
$3.795
million

Net unrealized gain on TS Income

statement

CREDIT
$3.795
million

CPA EXAM QUESTIONS

CPA 2: LO 12 3
Lark`s investments are AFS securities, because they are long-term
investments. As we know AFS securities should be reported at their fair
value. Also, unrealized holding gains and losses should be reported in
OCI and added in the balance of accumulated OCI (AOCI) of the
stockholder equity section. So, we need to find the net unrealized
holding gain or loss for Dec. 31, 2013:
OCI:
$240,000(FV) - $180,000(prior FV) = $60,000 (net unrealized holding
gain)
AOCI:
$240,000(FV) - $200,000(Cost) = $40,000 (net unrealized holding
gain)
Answer is: a
CPA 3: LO 12 3
In this problem we need to find the cost of Long-term investments in
marketable value. Calculation would be:
$96,450(FV) + $19,000(net unrealized holding loss on LT invest.) =
$116,250(Cost)
Answer is: d
CMA 1: LO 12 3
AFS are investments in debt or equity securities. Classification of AFS
made by U.S.GAAP in order to record investments in the accounting
records of the business. These investments usually recorded at their

ACCT. 3021 HW 12b

Fair value in the balance sheet of the company.
Answer is: c
CMA 2: LO 12 3
In this problem we have to determine the amount of unrealized holding
gain or loss for May 31, year 3. Difference between amortized cost and
fair value is the amount of unrealized holding gains and losses.
Calculation would be:
$643,500 (FV) - $635,495 (amortized cost) = $8,005 unrealized holding
gain.
Gain of $8,005 we should record in accumulated OCI.
Answer is: b
CMA 3: 12 3
As we remember from the book that under U.S. GAAP HTM`s are
reported at their amortized cost and any gains or losses should be
ignored.
Answer is: d