Question

1:11 PM Sun Feb 9 20% C16 #2 Exercise 16-12a-b (Video) Cullumber Company has the following data at December 31, 2020. Securities Fair Value Trading Available for sale Cost $119,400 102,100 $126,900 90,500 The available-for-sale securities are held as a long-term investment Prepare the adjusting entries to report: (1) Trading securities at fair value and (2) Available-for-sale securities at fair value. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry for the account titles and enter for the amounts.) No Account Titles and Explanation (1) Fair Value Adjustment Trading Unrealized Gain or Loss-Equity (2) Unrealized Gain or Loss-Equity Fair Value Adjustment-Available for Sale 11600 Indicate the statement presentation of each class of securities and the related unrealized gain (loss) accounts. Cullumber Company Balance Sheet (l'artial) December 31, 2020 Current Assets Short-term, at fair value s 126900 Investments Debt investments, at fair value 90500 Stockholders' Equity Less Accumulated Other Comprehensive Income 11600 Cullumber Company Income Statement (Partial) For the Year Ended December 31, 2020

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Answer 1

Held for trading:

Theses are securities or investments that are purchased by a company with the intention of selling them within a short period. These kind of investments are always adjusted according to their fair values at balance sheet date. Any difference between cost and fair value is recognized as unrealized gain/loss on Trading securities in the income statement.

Available for Sale:

Theses are securities or investments that are purchased by a company with the intention of selling them after a long period, but before maturity. These kind of investments are always adjusted according to their fair values at balance sheet date. Any difference between cost and fair value is recognized as unrealized gain/loss in the other comprehensive income under the equity section of balance sheet.

Following are the adjusting entries to be passed:

1.Held for trading:

Cost - $119,400 Fair value - $126,900

There has been an increase in the fairvalue of investment, there by an unrealized gain of $7,500 is to adjusted (ie. Fair value - Cost). This is the gain that the company would have made had it sold the investment on balance sheet date. However since the investment is not sold, this gain is unrealized. The investment is classified as "Held for trading" , so unrealized gain will be shown in income statement. "Unrealized Gain or Loss" a/c will charge the income statement with this unrealized gain.On the same note, "Fair value adjustment- Trading" a/c will effect the balance sheet value of the investment. Below is the journal entry to be passed:

Fair value adjustment - Trading $7,500

To Unrealized Gain or loss - Income statement $7,500

2.Available for Sale:

Cost - $102,100 Fair value - $90,500

Fair value of the investment has reduced, The company has an unrealized loss of $11,600 (ie. Fair value - Cost). This is the loss that the company would have made had it sold the investment on balance sheet date. However since the investment is not sold, this gain is unrealized. The investment is classified as "Available for Sale" , so unrealized losses will bypass the income statement to Other Comprehensive Income. Hence net income of the company will not be effected by this change. "Unrealized Gain or Loss - equity" a/c will charge the other comprehensive income with this unrealized loss and "Fair value adjustment- Available for sale" a/c will effect the balance sheet value of the investment. Below is the journal entry to be passed:

Unrealized Gain or loss - equity $11,600

To Fair value adjustment - Available for Sale $11,600

Classification in the balance sheet:

1. Held for Trading :- Short term investments under Current Assets @ $126,900 (Fair value)

2. Available for Sale :- Long term investment under Investments @ $90,500 (Fair value)

Unrealized loss of available for sale investment :- Reduce from share holders equity as accumulated other comprehensive income (Since this amount will not affect the income statement) @ $11,600

Classification in the Income statement:

1. Held for Trading :- Unrealized gain on trading securities under Other revenues and gains @ $7,500

2. Available for Sale :- No effect.