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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Fair value journal entries, available for sale investments

Hurricane Inc. purchased a portfolio of available-for-sale .securities in Year 1, its first year of operations. The cost and fair value of this portfolio on December 31, Year 1, was as follows:

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On June 12, Year 2, Hurricane purchased 1,450 shares of Rogue Wave Inc. at $45 per share plus a $100 brokerage commission.

a. Provide the journal entries to record the following:

1. The adjustment of the available-for-sale security portfolio to fair value on December 31, Year 1.

2. The June 12, Year 2, purchase of Rogue Wave Inc. stock.

b. How are unrealized gains and losses treated differently for available-for-sale securities than for trading securities?

(a) (1)

To determine

Available-for-sale securities: These are short-term or long-term investments in debt and equity securities with an intention of holding the investment for some strategic purposes like meeting liquidity needs, or manage interest risk.

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.

To journalize: The stock investment transactions in the books of Incorporation H

Explanation

  • Valuation Allowance for Available-for-Sale Investments is a contra-asset account. The account is debited because the market price was increased (loss) to $93,400 from the cost of $89,120.
  • Unrealized Gain (Loss) on Available-for-Sale Investments 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, and an increase in stockholders’ equity value is credited.

Working Notes:

Compute the unrealized gain (loss) as on December 31...

(b)

To determine

To describe: The accounting treatment of available-for-sale securities, which makes it distinct from trading securities

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