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Fair Value Adjustment – Dec. 31, 2021

Fair Value Adjustment – Dec. 31, 2021

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Available-for-Sale Debt Securities

Financial Statement Presentation



LO 1



Copyright ©2019 John Wiley & Sons, Inc.



31



Investment in Debt Securities



Trading Securities (Fair Value Through Net

Income)

Companies report trading securities at

• fair value, with

• unrealized holding gains and losses reported as

part of net income.

Any discount or premium is amortized.

A holding gain or loss is the net change in fair value of a

security from one period to another, exclusive of dividend

or interest revenue recognized but not received.

LO 1



Copyright ©2019 John Wiley & Sons, Inc.



32



Trading Securities

Debt Securities



Illustration: On December 31, 2020, Western Publishing

Corporation determined its trading securities portfolio to be as

follows:



LO 1



Copyright ©2019 John Wiley & Sons, Inc.



33



Trading Securities



Computation of Fair Value Adjustment—Trading

Securities Portfolio (2020)

Illustration: At December 31, Western Publishing makes an

adjusting entry:

Fair Value Adjustment

3,750

Unrealized Holding Gain or Loss—Equity



LO 1



Copyright ©2017 John Wiley & Sons, Inc.



3,750



34



Trading Securities



Illustration Debt Securities

Hendricks Corporation purchased trading investment bonds

for $50,000 at par. At December 31, Hendricks received

annual interest of $2,000, and the fair value of the bonds was

$47,400.

Instructions:

a. Prepare the journal entry for the purchase of the

investment.

b. Prepare the journal entry for the interest received.

c. Prepare the journal entry for the fair value adjustment.

LO 1



Copyright ©2019 John Wiley & Sons, Inc.



35



Trading Debt Securities



Journal Entry for Purchase of Investment

Hendricks Corporation purchased trading investment bonds

for $50,000 at par. At December 31, Hendricks received

annual interest of $2,000, and the fair value of the bonds was

$47,400. Prepare the journal entry for the purchase of the

investment.

Debt Investments

Cash



LO 1



50,000



Copyright ©2019 John Wiley & Sons, Inc.



50,000



36



Trading Debt Securities



Journal Entry for Interest Received

Hendricks Corporation purchased trading investment bonds

for $50,000 at par. At December 31, Hendricks received

annual interest of $2,000, and the fair value of the bonds was

$47,400. Prepare the journal entry for the interest received.

Cash

Interest Revenue



LO 1



2,000



Copyright ©2019 John Wiley & Sons, Inc.



2,000



37



Trading Debt Securities



Journal Entry for Fair Value Adjustment

Hendricks Corporation purchased trading investment bonds

for $50,000 at par. At December 31, Hendricks received

annual interest of $2,000, and the fair value of the bonds was

$47,400. Prepare the journal entry for the fair value

adjustment.

Unrealized Holding Loss – Income

Fair Value Adjustment



LO 1



Copyright ©2019 John Wiley & Sons, Inc.



2,600

2,600



38



Learning Objective 2

Describe the Accounting for Investments in

Equity Securities



LO 2



Copyright ©2019 John Wiley & Sons, Inc.



39



Investments in Equity Securities

Represent ownership of capital stock.

Cost includes:

• price of the security, plus

• broker’s commissions and fees related to purchase.

The degree to which one corporation (investor) acquires

an interest in the common stock of another corporation

(investee) generally determines the accounting treatment

for the investment subsequent to acquisition.

LO 2



Copyright ©2019 John Wiley & Sons, Inc.



40



Classification of Equity Investments



LO 2



Copyright ©2019 John Wiley & Sons, Inc.



41



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