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Purchasing Available-for-Sale Securities

Brian Krogol
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Alright, now let's look into more details and the journal entries for the available for sale securities. So when we're studying these available for sale securities, I want you to notice how similar everything we do is to trading securities. The only difference is that we're gonna be taking our changes in fair value in other comprehensive income. Okay. So everything else is gonna be the same. We're just gonna be dealing with other comprehensive income when it comes to our unrealized gains and losses. So available for sale securities. This is there so slightly different from trading securities. They're gonna have to tell you if they're available for sale, they have the intent of being sold, but we're not actively trading them like we did with trading securities. Okay. So A. F. S. Securities earn income from dividends just like we saw with trading security and changes in fair value. Okay. But notice that these changes in fair value when we haven't sold the investment yet and it's unrealized. That's the main difference. So the classifications for the these available for sale, they can be current or long term, they would tell you in the problem whether you're gonna show it in the current assets section of your balance sheet or the long term section of your balance sheet. Okay. They'll have to tell you the initial measurement of the stock, just like everything is going to be at cost. Okay. We have to show it at what we purchased it for and then subsequently we're gonna measure it at fair value, just like we did with trading securities. But the difference here, like I said, is that these unrealized gains or losses are going to other comprehensive income. Okay, Other comprehensive income, that's where we're gonna show the unrealized gains or losses. And I'm gonna highlight that because that is that is the main difference here. Okay, so let's go ahead and start with our purchase entry. So on november 1st year one abc company purchased 500 shares of X. Y. Z. Company Common stock at a total price of $40,000. Abc company intends to sell the investment and classified them as available for sale. So notice they told us straight up available for sale, they're gonna have to tell you something like that. They might even say something like they intended to sell the investment but did not classify them as trading securities. So then they're obviously available for sale. Okay? So because if you intend to sell them, they're not going to be held to maturity. So here we go. We've got 500 shares at a total price of 40,000. So there's two ways they can give you this information, they could tell you we spent 40,000 for 500 shares. Or they could give you a per share price, we bought 500 shares at a price of $80 per share, right? Would have been the per share price. 40,000 total spent divided by 500 shares. That comes out to $80 per share. Right? So they could have told you either way, they could have told you we spent $80 per share, or they can tell you the total amount the important amount for the journal entry, which one is important for the journal entry, the per share or the total amount the total amount. Right? So in this journal entry they actually made it a little easier by telling us what the total amount is. So in our journal entry we would say we would debit our investment, we would create this asset investment in available for sale By debating it for 40,000 and we paid for it with cash. So we would credit cash for 40,000. Right? So now we have this investment and available for sale. It's increasing our assets by by the 40,000, but we also paid for it with cash. So So our net assets stay the same. We're gonna have the same amount of assets for our total assets. So our cash decreases by 40,000. And nothing really changed there. Okay, so you should be comfortable with that journal entry. Nothing too crazy there. Let's go ahead and move on to the next one.