Question

Martinez Company in its first year of operations provides the following information related to one of its available-for-sale debt securities at December 31, 2020.

Amortized cost		$50,600
Fair value		41,200
Expected credit losses		12,350

1) what is the amount of the credit loss that Martinez should report on this available-for-sale security at December 31, 2020?

2) Prepare the journal entry to record the credit loss, if any ( and any other adjustment needed), at December 31, 2020?

3) Assume that the fair value of the available-for-sale security is $54,200 at December 31, 2020, instead of $41,200/ What is the amount of the credit loss that Martinez should report at December 31,2020?

4) assume the same information as for part 3. Prepare the journal entry to record the credit loss, if necessary ( and any other adjustment needed), at December 31,2020.

Answer 1

Answer:

1. Available for sale securities are required to be reported at fair value.

Hence the difference between amortized cost and fair value is required to be transferred to other comprehensive income.

The amount of credit loss that Martinez should report on this available for sale security at 31-12-2020

= $50600-$41200 = $9400.

2. Journal entry

Date Particulars Debit($) Credit($)

31-12-2020 Loss on available for sale securities 9400

To Available for sale investment 9400

(journal entry to record the decline in the value of available

for sale investment)

Note: Loss is recorded under other comprehensive income.

3.In this case fair value is greater than the amortized cost , hence the credit gain should be reported by Martinez

=$50600-$54200 = $3600

4. Journal entry

Date Particulars Debit($) Credit($)

31-12-2020 Available for sale investment 3600

To gain on Available for sale securities 3600

(journal entry to record the increase in the value of available

for sale investment)

Note: There is no treatment for expected credit losses.