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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

Balance sheet presentation of available-for-sale investments

During Year 1, its first year of operations, Galileo Company purchased two available-for- sale investments as follows:

Security Shares Purchased Cost
Hawking Inc. 900 $44,000
Pavlov Co. 1,780 38,000

Assume that as of December 31, Year 1, the Hawking Inc. stock had a market value of $50 per share and the Pavlov Co. stock had a market value of $24 per share. Galileo Company had net income of $300,000 and paid no dividends for the year ended December 31, Year 1. All of the available-for-sale investments are classified as current assets.

a. Prepare the Current Assets section of the balance sheet presentation for the available- for-sale investments.

Prepare the Stockholders Equity section of the balance sheet to reflect the earnings and unrealized gain (loss) for the available-for-sale investments.

(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.

To indicate: The presentation of available-for-sale investments on the current assets section of the balance sheet

Explanation

Balance sheet presentation:

Company G
Balance Sheet (Partial)
December 31, Year 1
Assets
Current assets:    
    Available-for-sale investments (at cost) $82,000  
    Add valuation allowance for available-for-sale investments 5,720  
    Available-for-sale investments (at fair value)   $87,720

Table (1)

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 H 900 shares

(b)

To determine

To indicate: The presentation of available-for-sale investments on the stockholders’ equity section of the balance sheet

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