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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Available-for-Sale Securities At the end of 2018, Terry Company prepared the following schedule of investments in available-for-sale debt securities (all of which were acquired at par value):

Chapter 13, Problem 13E, Available-for-Sale Securities At the end of 2018, Terry Company prepared the following schedule of , example  1

During 2019, the following transactions occurred:

Chapter 13, Problem 13E, Available-for-Sale Securities At the end of 2018, Terry Company prepared the following schedule of , example  2

Required:

1. Prepare journal entries to record the preceding information.

2. Show how the preceding items are reported on Terry’s December 31, 2019, balance sheet. Assume all investments are noncurrent.

3. Next Level If Terry uses IFRS, how would the accounting for investments be different from U.S. GAAP?

1.

To determine

Prepare the journal entries to record the transactions related to available-for-sale securities.

Explanation

Prepare the journal entries to record the transactions related to available-for-sale securities.

Record the purchase of Company O’s share on July 1, 2019.

DateAccount Title and Explanation Debit Credit 
July 1, 2019Investment in Available-for-sale Securities$98,000 
         Cash $98,000
 (To record the purchase of Company O's common stock)  

Table (1)

Description:

  • Investment in available-for-sale securities is an asset. It is increased. Therefore, debit the investment in available-for-sale securities account.
  • Cash is an asset and decreased. Therefore, credit the cash account.

Record the sale of Company M’s securities on October 11, 2019.

DateAccount Title and Explanation Debit Credit 
October 11, 2019Cash$34,300 
 Loss on sale of Available-for-sale securities (Balancing figure)$2,000 
 

    Investment in Available-for-sale

    securities

 $35,000
     Interest income $1,300
 (To record the realized loss on sale of Company M's securities)  

Table (2)

Description:

  • Cash is an asset and increased. Therefore, debit the cash account.
  • Loss on sale of available-for-sale securities is a loss. It decreases the equity. Therefore, it is debited.
  • Investment in available-for-sale securities is an asset. It is decreased here due to sale. Therefore, credit the investment in available-for-sale securities account.
  • Interest income is an equity account, which is increased. Therefore, credit the interest income.

Reverse the cumulative unrealized loss that had accumulated at the end of December 31, 2018.

Company M’s securities has been purchased for $35,000, whose fair value as at December 31, 2018 is recorded as $34,200. Hence, the difference of $800($34,200$35,000) loss would have been recorded as unrealized holding loss and the same amount might have been credited as allowance. Now, the Company M’s securities have been sold on October 11, 2019, and realized loss as on October 11 also recorded. Hence, the previously recorded unrealized loss and allowance of $800 should be reversed as follows:

DateAccount Title and Explanation Debit Credit 
October 11, 2019Allowance for change in fair value of investment$800 
 

Unrealized holding gain/loss:

Available-for-sale securities

 $800
 (To record the allowance adjustment and reverse the unrealized loss on holding the Securities)  

Table (3)

Record the interest income received on December 31, 2019.

DateAccount Title and Explanation Debit Credit 
December 31, 2019Cash$6,000 
 Investment in available for sale securities $400 
        Interest income $6,400
 (To record the receipt of interest income from Company N and Company O)  

Table (4)

Working note:

Calculate the amount of discount amortization made on December 31, 2019

2.

To determine

Show how Company T would report the above transactions at its balance sheet at December 31, 2019.

3.

To determine

If Company T uses IFRS instead of GAAP, describe its difference between the treatment for investments.

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