Question

Exercise 13-12

Available-for-Sale Securities

At the end of 2018, Terry Company prepares the following schedule of investments in available-for-sale debt securities (all of which were acquired at par value):

Company                                 Amortized Cost            12/31/18                   Cumulative Change

                                                                                     Fair Value                 in Fair Value

Morgan Company                      $35,000                         $34,200                         $(800)

Nance Company                       $50,000                         $53,100                         $3,100

Totals                                       $85,000                         $87,300                         $2,300

During 2019, the following transaction occurred:

July      1          Purchased Oscar Company debt securities with a par value of 100,000 for $98,000.    The securities carry an annual interest rate of 10%, mature on December 31,2021, and pay interest semiannually on July 1 and December 31. Terry uses the straight-line method to amortize any discounts or premiums.

Oct.11              Sold all of the Morgan Company securities for $33,000 plus interest of $1,300.

Dec. 31             Received interest of $6,000 on the Nance Company and Oscar Company debt securities, and the following year-end total market values were available: Nance Company debt securities, $55,000; Oscar Company debt securities, $96,000

Required:

1. Prepare journal entries to record the preceding information.
2. Show how the preceding items are reported on Terry’s December 31, 2019, balance sheet. Assume all investments are noncurrent.
3. If Terry uses IFRS, how would the accounting for investments be different from U.S. GAAP?

Answer 1

Terry Company Requirement 1: Cumulative Journal Enteries Security FMV 12/31/18 Change in Fair Value Particulars Debit in $ Credit in $ Cost Date Jun-08 Cash a/c Nance 50000 55000 5000 Dr. 98000 Oscar 98000 96000 2000 To Investment in avail for sale 98000 148000 151000 3000 Oct-11 Cash a/c 33000 Dr. Loss on sale of securities a/c Dr. 2000 To Invest-avail for sale securities Requirement 3: 35000 For IFRS the accounting and presentation of the unrealized holding gain Dec-31 Cash a/c Dr. 6000 would be different.While the amount of the unrealized loss would be To Dividend income 6000 computed in the same manner,the unrealized holding gain/loss would be Allowance for change a/c reported as a component of income. Dr. 2000 To Unrealized holding gain/loss.. (OCI) If Terry decides at initial recognition, to have the unrealized holding 2000 gains and losses included in other comprehensive income,the accounting would be virtually identical to that under US GAAP. Requirement 2: Non-Current Assets: Investment in available for sale (at cost) 148000 Plus: Allowance for change in fair value 3000 Investment in available for sale (at fair value) 151000 Stockholders' Equity: Accumulated other comprehensive income: Unrealized holding gain - available for sale securities 3000