Hurricane Inc. purchased a portfolio of available-for-sale securities in 2016, i
ID: 2430354 • Letter: H
Question
Hurricane Inc. purchased a portfolio of available-for-sale securities in 2016, its first year of operations. The cost and fair value of this portfolio on December 31, 2016, was as follows:
1
Name
Number of Shares
Total Cost
Total Fair Value
2
Tornado Inc.
830.00
$14,857.00
$16,185.00
3
Tsunami Corp.
1,230.00
31,488.00
34,809.00
4
Typhoon Corp.
2,170.00
44,268.00
43,834.00
5
Total
$90,613.00
$94,828.00
On June 12, 2017, Hurricane purchased 1,400 shares of Rogue Wave Inc. at $50 per share plus a $80 brokerage commission.
Required:
Chart of Accounts
Journal
Shaded cells have feedback.
A. Provide the journal entries. Refer to the Chart of Accounts for exact wording of account titles. Be sure to enter the year as part of the date.
How does grading work?
PAGE 10
JOURNAL
Score: 33/51
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4
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Points:
6.47 / 10
Feedback
Check My Work
1. The gain or loss is the difference between the portfolio cost and its fair value. The offset account for the gain or loss entry is the valuation allowance account.
2. Increase the investment and decrease Cash for the purchase price (Shares x Per share amount) plus brokerage fee.
Final Question
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B. How are unrealized gains and losses treated differently for available-for-sale securities than for trading securities?
Unrealized gains and losses for available-for-sale securities are accumulated over time and reported as a credit (positive) or debit (negative) balance in the Stockholders’ Equity section. As a result, the changes in fair valueare not reflected on the income statement, as is the case with trading securities. Bypassing the income statement issupported on the grounds that available-for-sale securities will be held for alonger time than trading securities; thus, fluctuations in market prices havea greater opportunity to “cancel out” over time.
Points:
5 / 5
1
Name
Number of Shares
Total Cost
Total Fair Value
2
Tornado Inc.
830.00
$14,857.00
$16,185.00
3
Tsunami Corp.
1,230.00
31,488.00
34,809.00
4
Typhoon Corp.
2,170.00
44,268.00
43,834.00
5
Total
$90,613.00
$94,828.00
Explanation / Answer
Solution A:
Solution B:
Unrealized gains and losses for available-for-sale securities are accumulated over time and reported as a credit (positive) or debit (negative) balance in the Stockholders’ Equity section. As a result, the changes in fair value are not reflected on the income statement, as is the case with trading securities. Bypassing the income statement is supported on the grounds that available-for-sale securities will be held for a longer time than trading securities; thus, fluctuations in market prices have a greater opportunity to “cancel out” over time.
Journal Entries - Hurricane INC. Date Particulars Debit Credit 31-Dec-16 Valuation Allowance for Available-for-Sale Investments Dr ($94,828 - $90,613) $4,215.00 To Unrealized Gain (Loss) on Available-for-Sale Investments $4,215.00 (Being fair value adjustment on AFS securities) 12-Jun-17 Investment in Rough Wave INC. - Available for Sale Dr (1400*$50 + $80) $70,080.00 To Cash $70,080.00 (Being investment made in share of Rough Wave)Related Questions
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