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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

Storm, Inc. purchased the following available-for-sale securities during Year 1, its first year of operations:

Name Number of Shares Cost
Dust Devil. Inc 1.900 $81,700
Gale Co. 850 68.000
Whirlwind Co 2,850 114,000
Total   $263.700

The market price per .share for the available-for-sale security portfolio on December 31, Year 1, was as follows:

 

Market Price per Share,

Dec. 31, Year 1

Dust Devil. Inc $40
Gale Co. 75
Whirlwind Co. 42

a. Provide the journal entry to adjust the available-for-sale security portfolio to fair value on December 31, Year 1.

b. Describe the income statement impact from the December 31, Year 1, journal entry.

(a)

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 year-end valuation of available-for-sale securities transaction

Explanation

  • 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 loss has occurred and losses reduce stockholders’ equity value, and a decrease in stockholders’ equity value is debited.
  • Valuation Allowance for Available-for-Sale Investments is a contra-asset account. The account is credited because the market price was decreased (loss) to $259,450 from the cost of $263,700.

Working Notes:

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

Step 1: Compute the fair value of the portfolio of the available-for-sale investment.

Security Number of Shares × Fair Market Value = Fair Market Value of Investment
Incorporation DD 1,900 shares ×

(b)

To determine

To explain: The impact of the journal entry that was entered, on the income statement

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