Available for sale securities
Summary
TLDRThis educational video script delves into the intricacies of available-for-sale debt securities, distinguishing them from held-to-maturity and trading securities. It explains the concept of reporting these investments at fair value, which leads to unrealized holding gains and losses recorded in other comprehensive income (OCI) as part of equity. The script provides a detailed example of bond amortization and the process of adjusting these securities to market value, emphasizing the importance of fair value adjustments. It also touches on the impact of selling these securities and the reclassification adjustments involved. The speaker encourages viewers to explore more resources for a comprehensive understanding of accounting topics.
Takeaways
- đ Available-for-sale securities are debt investments that are neither held to maturity nor intended for trading.
- đŒ These securities are reported at fair value, which can lead to unrealized holding gains or losses.
- đ Unrealized gains or losses on available-for-sale securities are recorded in Other Comprehensive Income (OCI) and affect equity on the balance sheet.
- đ The adjustment process involves comparing the amortized cost of the security with its fair value to determine gains or losses.
- đ Fair Value Adjustment and Unrealized Gain/Loss accounts are used to record the necessary entries for these securities.
- đ An amortization schedule is created to account for the premium or discount on bonds and to calculate interest revenue.
- đ” When bonds are sold, the realized gain or loss is recorded on the income statement, and a reclassification adjustment is made.
- đ Fair value adjustments are made at each reporting period to reflect the current market value of the securities.
- đ The key to adjusting available-for-sale securities is understanding the difference between amortized cost and fair value.
- đ For a portfolio of securities, the overall gain or loss is calculated and used to adjust the fair value and unrealized gain/loss accounts accordingly.
Q & A
What are available-for-sale securities?
-Available-for-sale securities are debt investments that are not classified as held-to-maturity or trading securities. They are neither intended to be held until maturity nor are they bought with the intention of trading them in the near future. They are reported at fair value on the balance sheet.
How are unrealized gains and losses on available-for-sale securities reported?
-Unrealized gains and losses on available-for-sale securities are reported in other comprehensive income (OCI) and are part of equity on the balance sheet. They do not affect the income statement until the securities are sold.
What is the difference between held-to-maturity and available-for-sale securities?
-Held-to-maturity securities are debt investments that the company intends to hold until they mature, whereas available-for-sale securities are not intended to be held to maturity and can be sold if the price is right, but there is no immediate plan to do so.
Why are fluctuations in the value of available-for-sale securities not reflected in the income statement?
-Fluctuations in the value of available-for-sale securities are not reflected in the income statement to avoid volatility that could result from changes in market conditions. Instead, these fluctuations are recorded in OCI to maintain a stable income statement.
How does amortization of a bond premium or discount affect the carrying value of the bond?
-Amortization of a bond premium or discount affects the carrying value by reducing the premium or increasing the discount over time, which is reflected in the interest revenue calculation.
What is the process for adjusting the fair value of available-for-sale securities?
-The adjustment process involves comparing the amortized cost of the securities with their fair value. If there is a difference, an entry is made to the fair value adjustment account and the unrealized gain or loss account to reflect the change in value.
What happens to the unrealized gains and losses when available-for-sale securities are sold?
-When available-for-sale securities are sold, the unrealized gains or losses are reclassified from OCI to the income statement as realized gains or losses.
How are interest receivables recorded for bonds classified as available-for-sale securities?
-Interest receivables for available-for-sale bonds are recorded as interest revenue and as interest receivable on the balance sheet, depending on whether the interest has been received in cash or is yet to be received.
What is the significance of the fair value adjustment account in the context of available-for-sale securities?
-The fair value adjustment account is used to record the difference between the amortized cost and the fair value of available-for-sale securities. It is part of the process of adjusting these securities to their fair value on the balance sheet.
Can you provide an example of how to journalize the entries for available-for-sale securities?
-Yes, an example would be receiving interest on a bond, which would involve debiting cash for the amount received, crediting the investment to reduce its carrying value, and crediting interest revenue for the amount earned.
What is the role of other comprehensive income (OCI) in reporting available-for-sale securities?
-OCI is where unrealized gains and losses from available-for-sale securities are reported. It is a component of stockholders' equity and is used to record the changes in the fair value of these securities that have not been realized through a sale.
Outlines
đ Understanding Available-for-Sale Debt Securities
This paragraph introduces the concept of available-for-sale debt securities, distinguishing them from held-to-maturity and trading securities. It explains that these securities are neither intended to be held indefinitely nor traded in the near future. The focus is on how these securities are reported at fair value, leading to unrealized holding gains and losses which are recorded in other comprehensive income (OCI) as part of equity. An example is used to illustrate the process, starting with Adam Corporation's purchase of a bond at a premium. The paragraph also discusses the importance of adjusting these securities to market value and amortizing any discount or premium on the bond.
đ Journalizing Entries for Available-for-Sale Securities
The second paragraph delves into the process of journalizing entries for available-for-sale securities, emphasizing the importance of understanding fair value adjustments. It provides a detailed example of how to adjust the carrying value of a bond to its fair value, including the creation of necessary accounts such as 'Fair Value Adjustment' and 'Unrealized Holding Gain/Loss'. The paragraph explains how to handle the first journal entry when receiving interest and how to accrue interest before the receipt of payment. It also touches on the significance of fair value adjustments in reporting the true financial position of investments.
đ Adjusting Portfolio Securities to Fair Value
This section illustrates how to adjust a portfolio of securities to fair value, using examples to show how gains and losses are calculated and recorded. It explains the process of determining whether there is a gain or loss based on the fair value compared to the amortized cost, and how to adjust the 'Fair Value Adjustment' and 'Unrealized Holding Gain/Loss' accounts accordingly. The paragraph also discusses the concept of a timeline to track the portfolio's performance over time, including the sale of a bond and the recording of realized gains.
đ Reflecting Changes in Unrealized Gains/Losses Over Time
The fourth paragraph continues the discussion on how unrealized gains and losses are reflected over time. It uses a scenario to show how the fair value adjustment and unrealized holding gain or loss are affected as the portfolio's value changes from year to year. The paragraph explains the journal entries required when there is an improvement in the portfolio's loss or an increase in gain, emphasizing the movement along the timeline from a negative balance to a positive one and vice versa.
đ Resources for Further Learning on Securities Accounting
The final paragraph serves as a call to action for further learning, directing viewers to foreheadlectures.com for additional resources such as multiple choice questions and other study materials. It highlights the importance of understanding not only available-for-sale securities but also other types like held-to-maturity and trading securities. The paragraph encourages viewers to invest in their education and make use of the resources provided to enhance their knowledge and performance in accounting.
Mindmap
Keywords
đĄDebt Investment
đĄAvailable-for-Sale Securities
đĄFair Value
đĄUnrealized Holding Gain/Loss
đĄOther Comprehensive Income (OCI)
đĄAmortization
đĄYield
đĄPremium
đĄCarrying Value
đĄAccrual Accounting
đĄRealized Gain/Loss
Highlights
Introduction to available for sale securities, focusing specifically on debt investments.
Distinction between held to maturity, trading securities, and available for sale securities.
Available for sale securities are not held to maturity and not intended for immediate trading.
Reporting available for sale securities at fair value, leading to unrealized holding gains and losses.
Unrealized gains and losses are reported in other comprehensive income (OCI) rather than the income statement.
Importance of understanding how to adjust securities to market value.
Example of Adam Corporation purchasing a bond at a premium and the implications for accounting.
Creation of an amortization schedule for the bond purchased at a premium.
Calculation of cash received from bond interest payments based on stated rates.
Accrual of interest receivable and adjustments to the investment carrying value.
Fair value adjustments are crucial for accurately reflecting the investment's market value.
Process of determining gains or losses based on fair value versus amortized cost.
Detailed explanation of journal entries for recording interest revenue and fair value adjustments.
Impact of portfolio adjustments on overall financial reporting and equity.
Emphasis on the importance of understanding reclassification adjustments and impairment.
Encouragement to utilize additional resources for deeper understanding of available for sale securities.
Transcripts
hello and welcome to this session in
which we would look at available for
sales securities specifically debt
available for sale securities in the
prior sessions we looked at the type of
investments that a company could have
could be a debt investment or an equity
investment and now we are focusing on
the debt investments under the debt
investments we could have them as hell
to maturity and this is what we
discussed specifically in the previous
recording
in this recording would look at
available for sale and then in the next
recording we look at trading securities
so what are available for that
securities and specifically here we are
dealing with debt not equity well these
securities are either not held to
maturity and not for trading what does
that mean the two extreme of investment
in that is this you can either hold them
until to mature health to maturity this
is what we talked about in the prior
session is you hold them until they
mature until the bond mature means you
hold them till the end
or you can trade them pray that mean you
you plan to sell them in the near future
like flipping them well guess what
available for sale it's not trading it's
not held to maturity it's some someplace
in between i'm gonna hold it i might
sell it if the price is right but i have
no plan to hold it forever and i don't
i'm not intend to sell it in the near
future flipping it now how to report
these investments once you decide it's
available for sale you would report them
at fair value and the most important
thing we're going to be focusing on in
this session and i believe that's the
most important thing to learn is how to
make the adjustment how to adjust those
securities to market because they are
reported at fair value since they are
reported at fair value it means we're
going to have unrealized holding gainer
and losses and because we have
unrealized holding gain and losses those
will be reported in other comprehensive
income oci in other words they are
reported on the balance sheet as part of
equity now you might be asking why well
why is this available for sale you don't
plan to sell them in the near future it
means they should not be affecting your
income that's the purpose you're going
to hold them for multiple period
but through those multiple period they
may go up in value down in value up in
value again down in value more down so
on and so forth you don't want those
fluctuation to affect your income
statement as of yet so you park them in
oci and once you sell them well you'll
have to report them on the income
statement and make a reclassification
which we'll talk about in a separate
recording but the point to remember is
available for sale securities
adjustments are reported in other
comprehensive income just i want to make
sure you understand this and we're going
to actually work an example and since
it's a bond we're gonna amortize the
bond amortize any discount and any
premium the best way to illustrate this
concept is to take a look at an example
adam corporation purchase forehead
lectures one hundred thousand ten
percent five-year bond on january first
twenty x zero the bond pay interest on
july in january
semi-annually adam paid 108.11 to yield
eight percent simply put the bond was
sold at a premium because the face value
is a hundred thousand the bond is paying
10 percent but
10 percent it's yielding 8 percent what
does it mean to yield 8 percent it means
the market is earning eight percent
however the bond is paying 10 and that's
why you paid a premium so simply put
adam will debit that investment which is
an asset now remember we are dealing
from the investor's perspective not from
the issuer there's a one whole recording
about when a company issue a bond at a
premium or a discount go to my bonds
chapter and
adam will credit cash 108 111 what we
paid for the account what we paid for
the
what we paid for the investment now what
we will do next is create an
amortization schedule we have eight
thousand
and one hundred and eleven dollars as a
premium so we're gonna have the carrying
value of the bond 108 111
we're going to have a column for how
much cash we're going to be receiving
each period that's yielding 10 percent
annually
5 semi-annually
so the investor would receive 5 000
we have to compute interest revenue well
first let's compute the cash the cash is
taking the face value of the bond times
the stated rate times one half or six
divided by 12 because it pays interest
semi-annually that's where the cash 5000
is coming from interest revenue how do
we compute interest revenue we'll take
the carrying value of the bond as of the
beginning of the period times eight
percent times one half or six twelve so
the interest revenue is four thousand
three hundred and twenty four the
difference between those two is the
premium we are going to amortize this
period which is six hundred and seventy
dollars this is going to reduce the bond
carrying value to 107
435
the difference is 676 the difference
between the cash and the interest
revenue then we reduce the
carrying value because a premium bonds
starts above
above face value and it will go down as
we are amortizing the bond now the next
thing we're going to do we're going to
start to journalize the entries before
we generalize the entries i would like
to remind you whether you are a student
or a cpa candidate to take a look at my
website
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twitter and reddit so let's take a look
at the first journal entry when we
receive the first five thousand dollar
which will be july first acts zero so we
would receive five thousand dollar and
this is the information that we need to
journalize the entry we debit cash 5000
credit the investment
we don't credit the premium here we
credit the investment to reduce it and
we credit interest revenue for the 4324.
now on december 31st which is one day
before we receive the payment we have to
accrue the interest so what do we have
to do we have to accrue 5 000 worth of
cash as interest receivable we have to
credit the
debt investment reduce our debt
investment carrying value by 703 and we
record interest revenue of 42.97 simply
put the following day we would receive
the cash for this 5000 we debit cash
credit receivable but this jet journal
entry takes place december 31st
20 x 0 just to show you how we will
accrue the interest now it's very
important to understand how we make the
fair value adjustment extremely
important like what i'm going to be
doing now this is the important part
about fair value adjustment or adjusting
the fair value of the investment or
investing in the portfolio investment
the portfolio to fair value or reporting
things at fair value whatever you want
to call it there's a lot of fair value
terminology going on going on here
so this is
december 31st tx1 value of the bond on
the books 106 732
you are told the fair value of the bond
is 104 and these are available for sales
securities this this one is available
for sale security what do we have to do
now so i'm going to give you a few rules
please write them down please make sure
you are aware of this
okay so i'm going to show you how to
adjust your
investment or your portfolio to market
how do you do so well you're going to
have two accounts you're going to have
two related accounts one called
fare
value
adjustment and the other one it's going
to be called on
realized
gain slash loss
and specifically i'm going to call it
here equity and the word equity is
important because this is available for
sale and the adjustment goes to equity
so we're going to have those two
accounts what goes into those two
accounts please listen to me carefully
what you do first you compute whether
you have a loss or a gain and you should
be able to know whether you have a loss
or a gain based on what is your fair
value and what is the amortized cost
here the amortized cost is 106 732 but
if you want to sell your bond today
you're going to get 104. what does that
mean it means you have a loss
of 2732.
simply put the difference between what
you can sell the bond for what you have
it reported on the books
how do you adjust this bond well you
have those two accounts
if you have an overall a loss
listen to me carefully if you have an
overall a loss
fair value adjustment should have a
credit balance
and i said balance not adjustment a
credit balance
and the credit balance should be for the
amount of the loss how much is the lost
loss losses 2732 simply put you would
say my balance
not my entry
my balance should be
a credit balance of 27
27 32. this should be my balance now
what should be my entry well my entry
depending on what is my pr prior balance
is because fair value adjustment could
be either a contra asset it could be
reducing your asset it could be an
adjunct asset sometime it's going to
increase your investment sometimes it's
going to reduce your investment but the
balance should be 27.32 now for this
example we assume that our prior balance
is zero because this is year one
the so first you start with your fair
value then from your fear value after
you input whatever you need to do in
fair value you will determine your the
other corresponding entry whether it's a
debit or a credit let's do the fair
value first well if you need a balance
of 2732
okay and you have a zero balance in that
account from the beginning so you need
to credit
27.32 so you need to credit 27.32
because you have a prior zero balance
you will come up with 27.32 as a credit
balance which is because it's a loss
the the corresponding debit or credit to
this adjustment is to the unrealized
gain now remember losses unrealized gain
slash losses losses will have a debit
balance so if you
credited fair value you're going to
debit unrealized loss 2732 and your
balance will be
27.32 so this is the balance
you should put the balance in a
different color
just to kind of illustrate the word
balance because that's important
so this is the balance 2732 this is your
balance
and in green is your entry therefore i
will
credit
fair value adjustment 2732 debit
unrealized holding gain or loss 27.32
now this is easy because i had no prior
balance
okay now we're going to work few
examples that i'm going to show you when
you have a prior balance especially when
you have a complete portfolio let's take
a look at an adjustment for a portfolio
of that securities portfolio means more
than one security whether you have and
happens to be two securities here but
whether you have two two hundred or two
thousand it all work the same way
we have an economic integration bond and
a youtube core bond the economic
integration bond has a cost amortized
cost of
500 the fair value of 101 300 the
youtube
has a cost of 200 000 fair value of 175
so we have a gain on the economic
integration forum a loss on the youtube
overall we have a portfolio loss of
fourteen thousand two hundred and we're
going to assume this is a first-year
adjustment so the there's no prior
balance it means we have to have
remember this is a loss what did i tell
you i told you we have a fair value
adjustment account and we have
uh unrealized
gain slash loss equity account so since
we have a loss of 14 14 200
we should have a credit of 14 200 as a
balance
then what do we have to do we have to
determine the adjustment well since we
have a zero balance the adjustment will
be a credit of fourteen thousand two
hundred a debit of fourteen thousand two
hundred to have a loss of 14 200. okay
so this is just basically like the prior
example that i just showed you so notice
we credited uh we debited a loss of
14200 credited fair value adjustment now
make a note of this
but let me show you on a timeline what
does it look like simply put on a
timeline
if if your portfolio is zero it means
you have no gain and no loss now you are
standing at negative
14 200. so make a note of this and
write jot this down that you are on the
timeline you are negative 14
200.
let's assume
on march 1st 20 x1
um we sold this bond
the amortized cost was 91 200 we sold it
for 94 000. we actually sold this bond
so we removed one bond from our
portfolio well what do we do we received
cash 94 000 we removed the bond at
amortized cost 91 400 and we sold it 2
500 more than the amortized cost
therefore we have an actual gain this is
a realized gain this is different than
this gain okay now later on in another
session we would learn something about
reclassification adjustment but we'll
talk about that later simply put the
gain on the sale goes on the
income statement versus unrealized gain
for available for sale securities goes
on the equity section of the balance
sheet now let's go to year two in year
two here's what's going to happen we
still have only one bond and that's the
youtube bond they have an amortized cost
of two hundred thousand fair value of
193 so overall for that year we have a
real unrealized loss of seven thousand
remember what we have in the prior year
in the prior year we have available i'm
sorry fair value adjustment with a
balance of 14 200 from the prior year
and we had the unrealized
gain slash loss equity and that had a
fourteen thousand two hundred
our portfolio has a loss of exactly
seven thousand what does that mean if we
have a loss of seven thousand it means
we have to adjust our portfolio to show
a loss of seven thousand what does that
mean once again it means our fair value
should have a balance of seven thousand
this is what we're saying exactly this
is what we're saying we should have a
balance of seven thousand well what did
we have in the prior year let's go back
to that
time
uh the line uh
line numbers we had negative fourteen
thousand two hundred negative as a
balance fourteen thousand two hundred
what happened now we we still have a
loss but our loss did improve so we were
at negative
fourteen thousand two hundred now our
loss is
seven thousand
simply put we move to the right we move
to the right
7200 unit what does that mean it means
we have to debit our fair value
adjustment let me put the adjustment and
adjustment in a different color we have
to debit our fair value adjustment seven
thousand two hundred the credit goes to
the unrealized holding gain or loss when
we do that we have a balance of seven
thousand and fair value and we have a
balance of seven thousand
under unrealized holding gain or loss
what we did on the on the number line we
move to the right every time we move to
the right
we are going to debit fair value
adjustment in credit unrealized holding
gain or loss simply put we still have a
loss we are still below zero this is
negative seven thousand but we moved
from negative fourteen thousand two
hundred to negative seven thousand
therefore when we move to the right okay
it it this this is not this is not
anywhere in your textbook we debit fair
value adjustment we credit unrealized
holding gain or loss now let me make
another scenario let's assume in here
this is x1 let's assume in here x 2
x 2
our portfolio has a cost of
a million dollar worth of portfolios and
a fair value of one million
and i'm gonna make it one thousand
dollar
what does that mean why did i use large
numbers because large numbers are
useless what you're looking for you're
looking for the difference in the
overall portfolio the difference is
i have a gain
of 1000 this is what i'm trying to show
you
what does that mean if i have a gain of
1000 in the following year here x2 it
means i moved from
i move from negative seven thousand i
move to the right
to positive
one thousand
okay what does that mean from a journal
entry perspective so i'm gonna again do
the fair value adjustment here from the
prior year i had 7000 as my balance so
i'm gonna remove this this is the
balance just it's the same thing i just
keep it up seven thousand is the balance
and unrealized gain and loss i have a
debit of seven thousand this is from the
prior year so the corresponding
other account unrealized holding gain or
loss
equity i have a debit balance of seven
thousand now what do i have to do since
i have a gain remember if i have a gain
i have to have a debit balance and fair
value it means my debit balance should
be a thousand
okay in my if the debit balance is a
thousand the credit balance here should
be a thousand okay
what is the entry that i need to make
and want the x2
to make that
balance a thousand here what i have to
do i'm moving more to the right i'm
going to have to debit
fair value 8 000
and credit unrealized holding gain eight
thousand simply put in year x two
eight thousand
and eight thousand what happened if i do
debit fair value eight thousand i'm
gonna be left with a thousand debit
balance which is it's reflecting my gain
of a thousand and if i credited
unrealized holding gain or loss eight
thousand i'm gonna have an eight one
thousand credit balance which is this is
what i need to show i have a one
thousand of a gain
then again in year x three
you look at your total portfolio cost
total portfolio fair value
you might in x3 you might go further to
the right if your portfolio you have
more than a thousand in gain
or you might go for example from a
thousand back to 200 you would still be
positive but you are worse off than the
prior year then you will debit
unrealized holding in or lost credit
fair value for 800 for that example
how do you report things on the
income statement and balance sheet
on the balance sheet we're going to
accrue any interest receivable if
there's any interest receivable on the
bond we're going to report the
investment at fair value for example 193
000
and we're also going to have under
stockholders equity the
other com other comprehensive loss which
happens to be in our example
seven thousand
seventh out um sorry
it should be not seven thousand two
hundred it should be
the unrealized loss should be seven
thousand not seven thousand two hundred
seven thousand the adjustment is seven
thousand two hundred
on the income statement we will show any
interest received whether it's cash or
recruit and remember we sold the
economic integration for an economic
integration bond and we had the realized
gain of 2500 this is not all about
available for sale securities for
available for sale securities you also
need to learn about reclassification
which is have a separate recording for
this and we need to talk about
impairment when those securities are
impaired how do we record for impairment
what should you do now you should go to
forehead lectures.com and work mcq's
multiple choice questions look at
additional resources to learn more
available for sale help to maturities
trading securities don't shortchange
yourself
my resources will help you do better
give me a try give me a month
give it a try you like it you keep it
you don't you cancel that's your risk
invest in yourself this is a long-term
investment good luck study hard and of
course stay safe
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