University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

96

Pages:

2
Author:

stud_ice13

Accounting for Available-for-Sale (AFS) Debt Securities Definition and Classification AFS securities are debt investments a company does not classify as trading or heldto-maturity. They are categorized based on the expected holding period: • • Short-term investments: If the company plans to sell them within one year or the operating cycle (whichever is longer). Long-term investments: If the expected holding period extends beyond this timeframe. Recording and Reporting at Fair Value • • Fair Value Adjustment: Companies adjust the carrying value of AFS securities for changes in fair value at the end of each reporting period. Unrealized Gains or Losses: These are reported as part of other comprehensive income within the equity section of the balance sheet, rather than on the income statement. The adjustment is recorded in a permanent account, "Fair Value Adjustment—AFS," to reflect the fair value of the securities. Example Journal Entries for AFS Securities Transactions 1. Purchases and Sales: o May 8: Purchased FedEx notes for $12,975 as AFS securities.  Journal Entry:  Debit: AFS Securities $12,975  Credit: Cash $12,975 o Sep. 2: Sold part of the FedEx investment for $4,475 (cost $4,325).  Calculate Gain on Sale: Sale Proceeds - Cost = $4,475 - $4,325 = $150  Journal Entry:  Debit: Cash $4,475  Credit: AFS Securities $4,325  Credit: Gain on Sale of Investments $150 o Oct. 2: Purchased Ajay bonds for $25,600 as AFS securities.  Journal Entry:  Debit: AFS Securities $25,600  Credit: Cash $25,600 2. Year-End Fair Value Adjustment (December 31): o Assume Gard Company’s first year holding short-term debt investments, with fair values of:  FedEx: $9,600 (carrying amount $8,650 after partial sale)  Ajay: $22,000 o Calculate Unrealized Gain or Loss: FedEx: Fair Value - Carrying Amount = $9,600 - $8,650 = $950 (Unrealized Gain)  Ajay: Fair Value - Cost = $22,000 - $25,600 = -$3,600 (Unrealized Loss)  Total Unrealized Loss = $950 gain - $3,600 loss = -$2,650 net unrealized loss Year-End Adjusting Journal Entry:  Debit: Unrealized Loss—Equity $2,650  Credit: Fair Value Adjustment—AFS $2,650  o This adjustment ensures that AFS securities are reflected at fair value on the balance sheet, with any unrealized gain or loss affecting the equity section under comprehensive income, rather than current period earnings.