Available for sale securities

Summary

This 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

• 📈 Available-for-sale securities are debt investments that are neither held to maturity nor intended for trading.
• 💼 These securities are reported at fair value, which can lead to unrealized holding gains or losses.
• 🔄 Unrealized gains or losses on available-for-sale securities are recorded in Other Comprehensive Income (OCI) and affect equity on the balance sheet.
• 📚 The adjustment process involves comparing the amortized cost of the security with its fair value to determine gains or losses.
• 📊 Fair Value Adjustment and Unrealized Gain/Loss accounts are used to record the necessary entries for these securities.
• 📋 An amortization schedule is created to account for the premium or discount on bonds and to calculate interest revenue.
• 💵 When bonds are sold, the realized gain or loss is recorded on the income statement, and a reclassification adjustment is made.
• 📅 Fair value adjustments are made at each reporting period to reflect the current market value of the securities.
• 🔑 The key to adjusting available-for-sale securities is understanding the difference between amortized cost and fair value.
• 🌐 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.