Fair value journal entries, available-for-sale investments Hurricane Inc. purchased a portfolio of available-for-sale securities in 2016, its first year of operations. The cost and fair value of this portfolio on December 31, 2016, was as follows: On June 12, 2017, 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, 2016. 2. The June 12, 2017, purchase of Rogue Wave Inc. stock. b. How are unrealized gains and losses treated differently for available-for-sale securities than for trading securities?

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 of Solution

(1)

Prepare adjusting entry for valuation of available-for-sale securities transaction.

Figure (1)

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, 2016.

Details	Amount ($)
Available-for-sale investments at fair value, December 31, 2016	$93,400
Less: Available-for-sale investments at cost, December 31, 2016	(89,120)
Unrealized gain (loss) on available-for-sale investments	$4,280

Table (1)

(2)

Prepare journal entry for the purchase of 1,450 shares of Incorporation R, at $45 per share and a brokerage of $100.

Date

Account Titles and Explanations

Post. Ref...

Answer 6

(b)

To determine

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

Accounting (Text Only)

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Accounting (Text Only)

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