7. Receivables and Investments
Available-for-Sale (AFS) Securities
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Purchasing Available-for-Sale Securities
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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.
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Dividend Revenue for Available-for-Sale Securities
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So just like we saw with trading securities available for sale securities can also earn dividend revenue when they receive dividends from their investment. So let's check this out on december 10th year one X. Y. Z. Company declared and paid a dividend of $1 per share. So we own 500 shares of the company. Just like we saw in the previous journal entry Times the $1 we receive per share. Well we're gonna receive $500 in dividends and this is gonna be received in cash, right? They're gonna pay dividends in cash. And since we own 500 shares will receive $500. So we're going to debit cash for 500 because we're receiving cash and what's gonna be our credit here. It's just like with trading securities were receiving dividend revenue and this goes to the income statement. Okay this is not the other comprehensive income, this still goes to the income statement. Remember only the unrealized gains or losses when we have changes in the fair value. That's what's gonna go to our other comprehensive income. That's shown on our comprehensive income statement. Not just our regular income statement. Okay. So if you don't remember what the comprehensive income statement is, Go ahead and type that into the search and look up that video. It's gonna be very simple. It's gonna be a short video. Just explaining that other comprehensive income, it just has our net income plus some other complicated issues such as these unrealized gains and losses from available for sale securities. Okay so one thing I want to note is that this dividend revenue, it's still non operating. It's not going to be sure at the top of our income statement, where we show our revenues from our sales from our actual core business. No, this is a non operating thing. We're not an investment bank, we're not in the business of buying and selling investments. This is a side thing that we're doing. So it's non operating. It'll still show up on our income statement. It'll just show up at the bottom part where we show other things that we do. Cool. So we received cash of 500. So our assets increased by 500 and our revenue from the dividends Increased by 500. So that's going to increase our equity by increasing our net income. Cool. Alright. So that's exactly the same as what we saw with trading securities. Let's go ahead and move on to the next one.
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Unrealized Gains and Losses for Available-for-Sale Securities (1)
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Alright, so now let's move on to those unrealized gains or losses. This is the difference between trading securities and available for sale securities. But you're gonna see the journal entries are essentially the same, it's just where the gains or losses go. So for these unrealized gains or losses they're gonna show up on the other comprehensive income. Okay. So this is stuff that doesn't go into our net income. When we show our net income on our income statement. Our other comprehensive income is other things that are shown on our comprehensive income statement. That also show other details, such as these unrealized gains or losses from available for sale securities. Okay. So if the market price of the investment has increased since the last realization revaluation, we're gonna have an unrealized gain. Okay. And if you want a better discussion about unrealized gains and losses, I would go back to the trading securities where I talk about it in a little more detail, but for this point you're gonna see that it's exactly the same as what we discussed in trading securities um that these unrealized gains or losses there. Just the changes in fair value since our last revaluation. Okay. So let's go ahead and see this one on december 31st year one X. Y. Z. Company stock had a market value of $65 per share. So the market price has changed since we originally purchased it. Remember we purchased our investment of 500 shares for $40,000. Right? So we had 500 shares and we had seen that it was an $80 per share For 40,000. Right? So we have purchased it for 40,000 and now the price has decreased to 65. Clearly we can see this as an unrealized loss, right? We haven't sold the investment so it's unrealized. And the price has decreased from 80 to 65. So 500 times $65 per share. That comes out to 32,500. Okay, so our our investment has dropped from 40,000 down to 32,500. This is a decrease of 7500. And remember the change in the fair value is what's important for a journal entry. So this 7500. This is the change in fair value and that's the amount of our unrealized loss. So let's go ahead and make our journal entry. Since we want to change the fair value of our investment down from 40,000. Remember it had a debit balance of 40,000 because it's an asset. But we're gonna need to credit it to to lower the value. So we're going to credit our investment In available for sale securities by 7500. And that will bring down that balance. What's gonna be our debit here are unrealized loss, right? We're going to debit the unrealized loss. But this is the main difference and this is usually how you're gonna have to show it on an exam if you have to show these journal entries for available for sale. All you're really gonna have to do is just let the teacher know that you know it's going to other comprehensive income. So you would just have to say that this unrealized loss is going to other comprehensive income. This is generally all you have to do. So it's not so complicated, right? This is very similar to what we did with trading securities. You just have to be explicit too. So the professor knows hey they know that the available for sale securities are going to other comprehensive income. That's the only difference. So there we go. We've got our journal entry 7500. Now I want to note that this other comprehensive income, it's still part of equity and taking a loss and other comprehensive income is still a loss in our equity. So let's go ahead and fill this out. Our investment decreased by 7500. Okay. And our unrealized loss. So the O. C. I. I'm gonna put O. Ci here, I'll put los O ci that's decreasing our equity by 7500. Okay. So one of the main things about this other comprehensive income is it's not going into retained earnings. That's the main difference here with these other comprehensive things. They're gonna be sitting in their own separate balance where we keep track of these separately from our retained earnings. Cool. Alright. So nothing too crazy there. You don't need to get so far into the details of what other comprehensive income is. Just know that these unrealized losses for available for sale securities. They go to other comprehensive income instead of the income statement. Cool. Alright. Let's go ahead and pause here, and we'll follow up with these T accounts to keep track of our investment.
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Unrealized Gains and Losses for Available-for-Sale Securities (2)
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So just like we did with Trading securities, we're gonna be updating the fair value of the investment based on the changes in the price. So we're gonna have our investment in available for sale securities. We'll have a t account for that to to keep track of the balance in the balance sheet. And we'll have our unrealized losses, gains or losses that are going to O. C. I write other comprehensive income. Cool. So what have we seen so far? We started with an investment of 40,000 when we purchased it in the first journal entry. Right. Our first journal entry on the previous page, we had our investment account at 40,000 and we just saw in the previous journal entry the price had decreased and we had a decrease in the value of the account of 7500. And that went to our unrealized losses on the other comprehensive income. Right? So at this point our our investment was sitting at 32,500 as of december 31st year one, right? As of december 31st year one. The price had decreased to 32,500. Cool. And this was a loss and year one. Right, we showed this loss in year 1 7500. Inno ci So let's go ahead and move on here with year two X. Y. Z. Company stock had a market value of $90 per share. So remember we have to keep track of what our previous valuation was in this case 32,500 see what the new value is and see what the changes in between them. So we had 500 shares at this $90 price. That means our fair value was 45,000 for our investment right? 45,000 at a price of $90. And our previous value as we saw right there was 32,500. When the price was 65, right? When the price was 65 it had a value of 32,500. So what was the increase here? It increased by 12,500. Right this is the change in fair value and that's what we need to put into our into our journal entry to bring the investment up to its fair value. Okay so in this situation we saw an increase in the fair value. So we need to increase the investment with a debit investment in A. F. S. Goes up by 12,500. And what's gonna be the credit in this case we still haven't sold the investment. So it's an unrealized gain right? This is a gain because the price went up but it's unrealized because we haven't sold it. Unrealized gain. And where does this go? Your professor wants to know that it's going to O. C. I. Right and that's gonna be 12,500 as well. So our investment goes up by 12,500. And our equity let me get out of the way here. The equity goes up by 12,500. So this is the gain in o. c. i. Is giving us a 12,500 increase to our equity. Cool. So if we go back to our t accounts here, what do we see happening in this journal entry? We increased the investment by 12,500. And that brought it to its fair value of 45,000 right? We wanted to show a value of 45,000 as of the end of the year because that's what it was worth. And that unrealized gain of 12,500 that went to go see I hear. Okay. O. c. I. And this was a gain in year two. Now, one more thing that we do when we're dealing with available for sale securities because when we get rid of our available for sale securities, we need to get rid of this section of other comprehensive income. Because right now our other comprehensive income Is gonna have this balance of 5000 right? The 12,500 credit minus the 7500 debit. Well that leaves us with a 5000 balance in the account. Okay. And that's gonna be important when we sell the investment, we need to get rid of this other comprehensive income balance. Okay because it's going to accumulate over years as we hold the investment, just like it would accumulate and retained earnings if it was a regular investment or any other type of income, it would accumulate and retained earnings, just like with all our net income. But since this is a special other comprehensive income, It's going to be sitting in this other comprehensive section and it's gonna have a balance of 5000 in this case based on all the changes that we've made to the account. Okay, so let's go ahead and um move on to the next video where we're going to talk about the realized gain or loss.
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Realized Gains and Losses for Available-for-Sale Securities
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Alright now let's see what happens when we finally sell and available for sale. Security. Okay. So note that they realized gains or losses for any security, any security that we have, they're always gonna show up on the income statement when we have a realized gain or loss. Okay. So if the selling price of the investment is less than the last revaluation, well, we're gonna have a realized loss, right? If we sold it for less, well, we got a loss, but if it if the selling price is more than the last revaluation, well, we're gonna have a realized gain, right? We'll have a gain on the sale or a loss on the sale of the investment. So let's see what happens in this case on february 12 year three abc company sold its investment in X. Y. Z. Stock at a market value of $70 per share. Okay, so remember as of the last valuation, we evaluate it at $90 per share. So the $90 per share. Well that was our last valuation. So we we were sitting at an investment, let's go ahead and put our investment here. We had 500 shares times uh $90 per share that had us at 45,000? Right, 45,000 was the total amount in the account in the investment account. So let's put that here investment Equals 45,000. But what was the cash, what's the cash we're receiving from this sale? Well that's from the selling price. The cash is going to be the 500 shares times the $70 selling price. And that's 35,000 right? 35,000 is the cash selling price. Right? So there's gonna be this 10,000 that we're dealing with as a difference. Now when we make our journal entry I want to show you a couple of things because remember what I told you about this balance, let me scroll back up to the T. Account. Remember this balance that was sitting in other comprehensive income. We need to get rid of it. It was sitting as a credit balance in other comprehensive income. We no longer have unrealized losses right there. There's no longer unrealized losses on the O. C. I. We need to get rid of it because of that. We're getting rid of the investment. We need to get rid of all related accounts. So since it was sitting with a credit balance of 5000 we need to get rid of that 5000 credit balance with a debit To the other comprehensive income. So I'm just gonna put it here as a debit to other comprehensive income. Um that's not technically the correct way to do it. But you're not gonna have to go too deep in this class of how we how we handle these these kind of transactions to get rid of it so that 5000 is a debit to get rid of the other comprehensive income. What other things do we know? We know that we received cash Of 35,000. Right so we're gonna have a debit of 35,000 to cash and we have to get rid of the investment. So we're gonna have a credit to the investment For 45,000. Okay. So now what we have to do is balance out this equation with one more debit and what's that debit gonna be that debit is going to be another 5000 for the loss right? This is going to be the loss on the sale Um loss on the sale of the securities. And this is going to the income statement right here. This 5000 loss. Okay so remember the only difference here is that we have to get rid of that other comprehensive income where we had a game sitting in other comprehensive income. Well we gotta get it out of there. Okay so we got to get rid of that because it was related to this investment and we no longer have the investment. So that's it. That's it for this journal entry. Nothing too complicated. It's just that we had to split up not the entire change in fair value. Some of that was related to what was sitting in other comprehensive income. Okay so our investment decreased by 45,000. And our cash we got cash in which was 35,000. So we had a net decrease their of our assets of 10,000. Right let me get out of the way for the equity behind me. Well we had the O. C. I. That we got rid of. We had that that increase in R. O. C. I. And we got rid of it with a decrease of 5000. And we had the loss which went to the income statement for 5000 as well. So everything stays balanced here. Okay so this might even be a little more than you have to deal with when it comes to available for sale securities. I just wanted to give you the whole picture. I doubt that when you learn it in your first accounting class that you're gonna have to go into all the details of other comprehensive income, most likely your teacher's just gonna want you to know that the unrealized gains or losses go through on other comprehensive income and you're not gonna have to go into so much detail. Okay so now that you have the whole picture, let's go ahead and try a practice problem.
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Problem
ProblemReset Company held investments in available-for-sale securities with a fair value of $180,000 as of December 31, 2017. Reset had originally purchased the investments at a price of $152,000 on January 1, 2017. What is the appropriate amount for Reset to report for these investments on its December 31, 2017 balance sheet?
A
$180,000
B
$152,000
C
$28,000 gain
D
Cannot be determined
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Problem
ProblemChitty Company often has excess cash on hand to invest. Suppose that Chitty purchases 640 shares of Bang Company common stock at a price of $35 per share. Chitty classifies the investment as available-for-sale securities. This purchase occurred on December 9, 2018. As of December 31, the market price of Chitty stock had increased to $41 per share. Chitty's journal entry on December 31, 2018 related to the investment in Bang Company stock would include:
A
A debit to Unrealized Gain on the Income Statement for $3,840
B
A debit to Investments on the Balance Sheet for $3,840
C
A credit to Unrealized Gain in Other Comprehensive Income for $3,840
D
A debit to Cash for $3,840
E
Two of the answers are correct