Question

Hurricane Inc. purchased a portfolio of available-for-sale securities in Year 1, its first year of operations. The cost and fair value of this portfolio on December 31, Year 1, was as follows:

1	Name	Number of Shares	Total Cost	Total Fair Value
2	Tornado Inc.	830.00	$14,857.00	$16,185.00
3	Tsunami Corp.	1,230.00	31,488.00	34,809.00
4	Typhoon Corp.	2,170.00	44,268.00	43,834.00
5	Total		$90,613.00	$94,828.00

On June 12, Year 2, Hurricane purchased 1,400 shares of Rogue Wave Inc. at $50 per share plus a $80 brokerage commission.

Required:

A.	Provide the journal entries to record the following (refer to the Chart of Accounts for exact wording of account titles): 1. The adjustment of the available-for-sale security portfolio to fair value on December 31, Year 1. 2. The June 12, Year 2, purchase of Rogue Wave Inc. stock.
B.	How are unrealized gains and losses treated differently for available-for-sale securities than for trading securities?

PAGE 10

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1
2

A2. Provide the journal entry to record the June 12, Year 2, purchase of Rogue Wave Inc. stock. Refer to the Chart of Accounts for exact wording of account titles.

PAGE 10

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1
2

B. How are unrealized gains and losses treated differently for available-for-sale securities than for trading securities?

Unrealized gains and losses for available-for-sale securities are accumulated over time and reported as a credit (positive) or debit (negative) balance in the ------ section. As a result, the changes in fair value ------ on the income statement, as is the case with trading securities. Bypassing the income statement is------- on the grounds that available-for-sale securities will be held for a --------- time than trading securities; thus, fluctuations in market prices have ------- to “cancel out” over time.

Answer 1

The adjustment for available-for-sale securities is basically the difference between the fair value and the cost of investment. It is adjusted by creating valuation allowance account as shown below.

Requirement a

The required journal entries are given below:

Date	Particulars	Debit	Credit
December 31, Year 1	Valuation allowance for available-for-sale investments ……………….Dr	$ 4,215
	Unrealised gain/(loss) on available-for-sale investments		$ 4,215
	(94,828-90,613)
	(Being adjustment entry for available-for-sale security made)
June 12, Year 2	Investments- Rogue Wave Inc …… Dr (1400*50+80)	$ 70,800
	Cash		$ 70,800
	(Being investment made in Rogue Wave Inc)

Requirement b

Unrealized gains and losses for available-for-sale securities are accumulated over time and reported as a credit(positive) or debit(negative) balance in the stockholders’ equity section. As a result, the changes in fair value are not reflected on income statement as is the case with trading securities. Bypassing the income statement is supported on the grounds that available-for-sale securities will be held for longer time than trading securities. Thus, fluctuations in market prices have a greater opportunity to ‘cancel out’ over time.

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