Data for investments in stock classified as trading securities are presented in bellow.
| Security | Cost | Fair-value |
| A B C | $17,500 12,500 23,000 $53,000 | $10,000 14,000 21,000 $51,000 |
Assume instead that the investments are classified as available-for-sale securities. The have the same cost and fair value. The securities are considered to be a long-term investment.
Instructions
- Prepare the adjusting entry at December 31, 2017, to report the securities at fair value.
- Show the statement presentation at December 31, 2017, after adjustment to fair value.
- E. Kretsinger, a member of the board of directors, does not understand the reporting of the unrealized gains or losses. Write a letter to Ms. Kretsinger explaining the reporting and the purposes that it serves.
Solution
The investments are classified as available-for-sale securities and are considered long-term investments. Therefore, the securities are reported at fair value, and the unrealized gain or loss is reported in Other Comprehensive Income (OCI).
Given Information
| Security | Cost | Fair Value |
|---|---|---|
| A | $17,500 | $10,000 |
| B | $12,500 | $14,000 |
| C | $23,000 | $21,000 |
| Total | $53,000 | $51,000 |
Based on the total amounts provided in the question:
Unrealized loss = Fair Value − Cost
= $51,000 − $53,000
= $2,000 loss
(a) Adjusting Entry — December 31, 2017
The securities must be adjusted from their cost of $53,000 to their fair value of $51,000.
| Account | Debit | Credit |
|---|---|---|
| Unrealized Holding Loss—OCI | $2,000 | |
| Fair Value Adjustment—Available-for-Sale Securities | $2,000 |
Explanation: The carrying amount of the available-for-sale securities is reduced from $53,000 to their fair value of $51,000. The $2,000 unrealized loss is reported in Other Comprehensive Income.
(b) Statement Presentation — December 31, 2017
Balance Sheet
Long-Term Investments:
Available-for-sale securities ........ $51,000
Stockholders' Equity
Accumulated Other Comprehensive Income (Loss) ........ $(2,000)
The unrealized loss is reported in Other Comprehensive Income rather than as part of net income.
(c) Letter to Ms. Kretsinger
Dear Ms. Kretsinger:
The company classifies these investments as available-for-sale securities and considers them to be long-term investments. Therefore, the securities are reported on the balance sheet at their current fair value.
At December 31, 2017, the securities have a total cost of $53,000 and a total fair value of $51,000. Therefore, the company reports an unrealized loss of $2,000.
Because these securities are classified as available-for-sale securities, the unrealized loss is not reported as part of net income. Instead, it is reported in Other Comprehensive Income and accumulated in shareholders' equity as Accumulated Other Comprehensive Income (Loss).
The purpose of reporting the securities at fair value is to provide financial statement users with information about the current value of the company's investments. Reporting the unrealized change separately from net income also distinguishes changes in investment values that have not yet been realized through a sale.
Sincerely,
Accounting Department
