Question

S&L Financial buys and sells securities which it classifies as available-for-sale. On December 27, 2018, S&L purchased Coca-Cola bonds at par for $875,000 and sold the bonds on January 3, 2019, for $880,000. At December 31, the bonds had a fair value of $873,000, and S&L has the intent and ability to hold the investment until fair value recovers.

Prepare journal entries to record (a) any unrealized gains or losses occurring in 2018 and (b) the sale of the bonds in 2019, including recognition of any unrealized gains in 2019 prior to sale and reclassification of amounts out of OCI.

• Record the entry to adjust to fair value on the date of sale.

Note: Enter debits before credits.

	Date General Journal Debit Credit January 03, 2019

• Record the entry to reverse the previous fair value adjustment.

Note: Enter debits before credits.

	Date General Journal Debit Credit January 03, 2019

• Record the entry for sale of investment in Coca Cola bonds.

Note: Enter debits before credits.

	Date General Journal Debit Credit January 03, 2019

Answer 1

In the Books of S&L Financials :

Purchases of Coca Cola Bonds, .on 27 Dec 2018 = $875,000

Sold the Bonds on 3 Jan 2019 = $873,000

At December 31, the bonds had a fair value of $873,000

Journal Entries :

Date   General Journal Debit($) Credit($)

27 Dec 2018 Available for Sale (Coca Cola Bonds) 875,000

Cash / Bank 875,000

(Purchases of Coca Cola Bonds)

(a) Any unrealized gains or losses occurring in 2018 :

Date   General Journal Debit($) Credit($)

31 Dec 2018 Unrealized Gain/Loss 2,000

Available for Sale (Coca Cola Bonds) 2,000

(Bonds Valued at Fair Value at Year End)

Explanation;

Assumed to 31 Dec 2018 is Year Ending date

Unrealized Gain/Loss = $275,000 - $273,000 = $2,000

(b) The sale of the bonds in 2019, including recognition of any unrealized gains in 2019 prior to sale and reclassification of amounts out of OCI.

   Date   General Journal Debit($) Credit($)

1. 3 Jan 2019 Available for Sale (Coca Cola Bonds) 7,000

Unrealized Gain/Loss 7,000

(Bonds Valued(Increased) at Fair Value on Prior to Sale)

Note :  Unrealized Gain/Loss = Fair Value of Bonds - Book Value / Carrying Value of Bonds

= $280,000 - $273,000

Unrealized Gain/Loss   = $7,000

   Date   General Journal Debit($) Credit($)

2. 3 Jan 2019 Cash / Bank 280,000

   Available for Sale (Coca Cola Bonds)    280,000

(Sale of Bonds at Market Value)

Date   General Journal Debit($) Credit($)

3. 3 Jan 2019    Unrealized Gain/Loss 5,000  

   Realized Gain on Sale of Bonds 5000   

   (Gain Booked on Sale of Bonds)

Note : Realized Gain    =    Fair Value of Bonds - Purchase Value of Bonds

= $280,000 - $275,000

Realized Gain = $5,000

(OR)

Realized Gain = Unrealized Gain (Cr Balance)   - Unrealized Gain (Dr Balance)

   = $7000 - $2000

   = $5000

This Gain is to be Reported in Current Year Income Statement as a Gain on Available for Sale of Bonds.

Concept ;

Decrease in Value of the Available for Sale of Bonds

If at year end , the Available for sale Bonds has decreased in value, then the Bonds must be written down to the Fair value and the unrealized loss charged to the unrealized Gain/Loss . The unrealized gain/loss is a permanent account reported as part of comprehensive income, a separate component of shareholders equity.

Increase in Value the Available for Sale of Bonds

If at year end , the Available for sale Bonds has increased in value, then the investments must be increased to the new fair value and the unrealized gain credited to the unrealized Gain/Loss.

Disposal of the Available for Sale of Bonds

When an Available for sale Bonds is sold, the difference between the proceeds ( the carrying value of the securities and the balance on the unrealized gain/loss ) on the balance sheet results in a Realized Gain or Loss.

THANK YOU !