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Chapter 13: 11Q (page 658)

(a) Assuming no Fair Value Adjustment account balance at the beginning of the year, prepare the adjusting entry at the end of the year if Laura Company鈥檚 available-for-sale debt securities have a fair value of \(60,000 below cost.

(b) Assume the same information as part (a), except that Laura Company has a debit balance in its Fair Value Adjustment account of \)10,000 at the beginning of the year. Prepare the adjusting entry at year-end.

Short Answer

Expert verified

Amount transferred to unrealized gain or loss at year-end is $60,000.

Amount transferred to unrealized gain or loss at year-end is $70,000.

Step by step solution

01

Definition of the fair value adjustment

The process of adjusting the difference between the book and the fair value of a security is known as fair value adjustment.

02

Journal entry of part (a)

a. In this part, the fair value of the Laura company鈥檚 available for sale security is 60,000 less than the book value of the security. It means debt security has an unrealized loss. Following is the adjusting entry of the fair value:

Particulars

Debit ($)

Credit ($)

Unrealized Holding Gain or Loss Dr

$60,000

To Fair Value Adjustment

$60,000

(Adjustment of the less amount of fair value)

Accumulated Other Comprehensive Income Dr

$60,000

ToUnrealized Holding Gain or Loss

$60,000

(Reporting of unrealized loss in other comprehensive income)

03

Journal entry of part (b)

b. In this part, the opening balance of the fair value adjustment account is 10,000, and the current year鈥檚 unrealized loss is 60,000. Hence, the total amount of unrealized loss is 70,000. Following entries are made:

Particulars

Debit ($)

Credit ($)

Unrealized Holding Gain or Loss Dr

$70,000

To Fair Value Adjustment

$70,000

(Adjustment of the less amount of fair value)

Accumulated Other Comprehensive Income Dr

$70,000

ToUnrealized Holding Gain or Loss

$70,000

(Reporting of unrealized loss in other comprehensive income)

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Most popular questions from this chapter

(Available-for-Sale Debt Securities Entries and Financial Statement Presentation) At December 31, 2017, the

available-for-sale debt portfolio for Steffi Graf, Inc. is as follows.

Security Cost Fair Value Unrealized Gain (Loss)

A \(17,500 \)15,000 (\(2,500)

B 12,500 14,000 1,500

C 23,000 25,500 2,500

Total \)53,000 \(54,500 1,500

Previous fair value adjustment balance鈥擠r. 400

Fair value adjustment鈥擠r. \)1,100

On January 20, 2018, Steffi Graf, Inc. sold security A for $15,100. The sale proceeds are net of brokerage fees.

Instructions

(a) Prepare the adjusting entry at December 31, 2017, to report the portfolio at fair value.

(b) Show the balance sheet presentation of the investment-related accounts at December 31, 2017. (Ignore notes presentation.)

(c) Prepare the journal entry for the 2018 sale of security A

BE13-3 (L01) Takemoto Corporation borrowed \(60,000 on November 1, 2017, by signing a \)61,350, 3-month, zero-interest bearing note. Prepare Takemoto鈥檚 November 1, 2017, entry; the December 31, 2017, annual adjusting entry; and the February 1, 2018, entry.

(Financial Statement Impact of Liability Transactions) Presented below is a list of possible transactions.

1. Purchased inventory for \(80,000 on account (assume perpetual system is used).

2. Issued an \)80,000 note payable in payment on account (see item 1 above).

3. Recorded accrued interest on the note from item 2 above.

4. Borrowed \(100,000 from the bank by signing a 6-month, \)112,000, zero-interest-bearing note.

5. Recognized 4 months鈥� interest expense on the note from item 4 above.

6. Recorded cash sales of \(75,260, which includes 6% sales tax.

7. Recorded wage expense of \)35,000. The cash paid was $25,000; the difference was due to various amounts withheld.

8. Recorded employer鈥檚 payroll taxes.

9. Accrued accumulated vacation pay.

10. Recorded an asset retirement obligation.

11. Recorded bonuses due to employees.

12. Recorded a contingent loss on a lawsuit that the company will probably lose.

13. Accrued warranty expense.

14. Paid warranty costs that were accrued in item 13 above.

15. Recorded sales of product and related service-type warranties.

16. Paid warranty costs under contracts from item 15 above.

17. Recognized warranty revenue (see item 15 above).

18. Recorded estimated liability for premium claims outstanding. InstructionsSet up a table using the format shown below and analyze the effect of the 18 transactions on the financial statement categories indicated.

#AssetsLiabilitiesOwners鈥� EquityNet income
1

Use the following code:I: Increase D: Decrease NE: No net effect

(Equity Investments) Kenseth Company has the following securities in its portfolio on December 31, 2017.

None of these investments are accounted for under the equity method.

Investments Cost Fair Value

1,500 shares of Gordon, Inc., common \( 73,500 \) 69,000

5,000 shares of Wallace Corp., common 180,000 175,000

400 shares

of Martin, Inc., preferred 60,000 61,600

\(313,500 \)305,600

All of the securities were purchased in 2017.

In 2018, Kenseth completed the following securities transactions.

March 1 Sold the 1,500 shares of Gordon, Inc., common, @ \(45 less fees of \)1,200

April 1 Bought 700 shares of Earnhart Corp., common, @ \(75 plus fees of \)1,300

Kenseth鈥檚 portfolio of equity securities appeared as follows on December 31, 2018.

Investments Cost Fair Value

5,000 shares of Wallace Corp., common \(180,000 \)175,000

700 shares of Earnhart Corp., common 53,800 50,400

400 shares of Martin, Inc., preferred 60,000 58,000

\(293,800 \)283,400

Instructions

Prepare the general journal entries for Kenseth Company for:

(a) The 2017 adjusting entry.

(b) The sale of the Gordon stock.

(c) The purchase of the Earnhart stock.

(d) The 2018 adjusting entry for the portfolio.

Question: At what amount should trading, available-for-sale, and held-to-maturity debt securities be reported on the balance sheet?
See all solutions

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