Chapter 15, Problem 3APSA

To determine

Answer to Problem 3APSA

Explanation of Solution

Introduction:

Available-for-sale (AFS) securities are securities/shares which are purchased to earn dividend, interest or to increase fair market value. When these securities are sold in the short term, then they become short term investments else they are considered as long term investments.

To determine:

1. Journal entries to record the transaction and events.
2. A table summarizing (a)Total cost, (b) Total fair value adjustment and (c) Total fair Value.
3. A table summarizing (A) the realized gains and losses, (b) the unrealized gains or losses

Solution:

1. The required journal entries and adjustment entries are shown in the explanation section.
2. The calculation is shown in the explanation section.
3. The calculation is shown in the explanation section.

Explanation:

1. The required journal entries and adjustment entries are as follows:

Entries to record purchase of shares:

Date	Particulars	Debit($)	Credit($)
20.01.2015	Long term investment (J &J)	20740
	Cash (To record shares purchased)		20740
20.02.2015	Long term investment- S Company	55665
	Cash (To record shares purchased)		55665
20.06.2015	Long term investments (M company)	40695
	Cash (To record shares purchased)		40695
22.07.2016	Long term investments- S company	13980
	Cash (Purchase of shares)		13980
31.12.2016	Long term investments (EK company)	15498
	Cash (Purchase of shares)		15498
27.02.2016	Long term investment-M company	161325
	Cash (Purchase of shares)		161325
30.06.2016	Long term investments-(B &D Company)	50835
	Cash (Purchase of shares)		50835

Working notes:
Calculation of Purchases: We use the formula mentioned below:

  $Purchases=\left(Numberofshares*Price/Unit\right)+Commision$

Date	Number of Shares	Price per unit	Commission	Purchases
20.01.2016	1000	$20.50	$240	$20740
20.02.2016	1200	$46.20	$225	$55665
20.06.2016	1500	$27	$195	$40695
22.07.2016	600	$22.50	$480	$13980
31.12.2016	900	$17	$198	$15498
27.02.2016	2400	$67	$525	$161325
30.06.2016	1400	$36	$435	$50835

The Fair Value adjustment entry is as follows:

Date	Particulars	Debit($)	Credit($)
31.12.2015	Unrealized loss −(Equity)	40695
	Fair Value adjustment-Trading (ST) (To record purchase of shares)		40695
Date	Particulars	Debit($)	Credit($)
31.12.2015	Fair Value Adjustment-AFS(LT)	21858
	Unrealized Loss-Equity		13818
	Unrealized Gain-Equity		8040

Calculation of cost and fair value:

J &J	20740	21500 (1000*$21.50)
S	55695	45600(!200*$38)
M	40695	46350(1500*$30.90)
Total	117100	113450

FV Adjustment = Cost- Value

  $=\$117100-\$113450=\$3650$

Calculation of cost and fair value:

K	15498	17325(900*$19.25)
SL	13980	12000(600*$20)
S	55665	42000(1200*$35)
Total	85143	71325

Calculation of cost and fair value:

B&D	50835	54600(1400*$39)
M	161325	165500(2400*$69)
Total	212160	220200

FV Adjustment = Cost- Value

  $\begin{array}{l} =\$117100-\$113450=\$3650\hfill \\ =\$85143-\$71325=\$13818\hfill \\ =\$212160-\$220200=\$8040\hfill \end{array}$

Calculation of required balance:
FV adjustment= Required balance- unadjusted balance

  $\begin{array}{l} =\$13818-\$3560=\$10168\hfill \\ =\$8040-\$13818=\$21858\hfill \end{array}$

Entries to record Sale of shares:

Date	Particulars	Debit($)	Credit($)
15.04.2016	Cash	22975
	Gain on sale of Short term investment (STI)		2235
	STI − Trading (G Company) (Entry for sales of shares)		20740
05.07.2016	Cash	35615
	Loss on sale of investments	5060
	Long term investments		40695
21.06.2016	Cash	56720
	Gain on sale of investments		1055
	Long term investments − S Company		55665
03.08.2016	Cash	9315
	Loss on sale of investments	4665
	Long term investments-SL Company		13980
01.11.2016	Cash	19850
	Gain on sale of investments		4352
	Long term investment-E Company		15498

Calculation of Sales received from shares:
We use the formula mentioned below:

  $Sales=\left(Numberofshares*Price/Unit\right)-Commision$

Date	Number of Shares	Price/unit	Commission	Sales
15.04.2016	1000	$23.50	$525	$22975
05.07.2016	1500	$23.90	$235	$35615
21.06.2016	1200	$48	$880	$56720
03.08.2016	600	$16.25	$435	$9315
01.11.2016	900	$22.75	$625	$19850

2. The following table summarizes the cost; fair value adjustment and fair value of portfolio on long term AFS at the end of given three years:

Particulars	31.12.2015 ($)	31.12.2016($)	31.12.2017($)
Long term AFS securities (Cost)	117100	85143	212160
Less: Far Value adjustment	(3650)	(13818)	8040)
Long term AFS securities (Fair Value)	113450	71325	220200

3. Statement showing realized and unrealized gains or loss at the end of given three years:

Particulars	2015($)	2016($)	2017($)
Realized Gains(Losses)
Sales of J &J Shares		2235
Sale of M shares		(5080)
Sale of SL shares			(4665)
Sale of S Shares			1055
Sale of EK shares			4352
Total realized Gain(Loss)	0	(2845)	742
Unrealized gain(Loss)	(3650)	(13818)	8040

The unrealized gain is equal to the fair value adjustment.