Question

Garcia Co. has the following available-for-sale securities outstanding on December 31, 2016 (its first year of operations).

Cost Fair Value

Rossi Corp. Stock $20,000 $19,000

Barker Company Stock 9,500 8,800

Boliva Company Stock 20,000 20,600

$49,500 $48,400

During 2017, Barker Company stock was sold for $9,200, the difference between the $9,200 and the “fair value” of $8,800 being recorded as a “Gain on Sale of Investments.” The market price of the stock on December 31, 2017, was: Rossi Corp. stock $19,900; Boliva Company stock $20,500. Garcia has not early adopted ASU 2016-01,

Required:

Briefly explain ASU 2016-01. What justification is there for valuing available-for-sale securities at fair value and reporting the unrealized gain or loss as part of stockholders' equity?

How should Garcia Company apply this rule on December 31, 2016? Explain.

Did Garcia Company properly account for the sale of the Barker Company stock? Explain.

Are there any additional entries necessary for Garcia Company at December 31, 2017, to reflect the facts on the financial statements in accordance with generally accepted accounting principles? Explain.

Answer 1

Answer

A.

Available-to-Sale (AFS) devices are called "non-strategic" investments, because they are not for business purposes, or are not organized until maturity.

Market value of AFS securities is available when necessary, the value of AFS securities is determined by the "mark to market" process, where their fair value is compared with market value, and profit / loss (which are weird , Because the security is still being issued and not yet sold) under the "Other Comprehensive Income" in the Income Statement and in the balance sheet (equity section) "Consolidated Reported Under "Comprehensive Income".

When an AFS decodity is being organized, the change in its value can not be considered as income.

B.

2016 being the first year of operations, it is apparent that Summerset stock was acquired at $9,500 and at year-end, its fair value was $8,800. There was a decline in its Fair Value of $700. This is an Unrealized Loss.

So, at 31 Dec 2016, Lexington should make following journal entry:

Unrealized Gain/Loss -Other Comprehensive Income	$700
Available-for-Sale Securities		$700
(Being record decrease in value of Summerset's available-for-sale stock.)

C.

By selling Summerset stock, Lexington has actually made a loss. It received cash of $9,200, but the previously recorded Fair Value ($8,800) plus the unrealized Gain ($700) totalled $9,500. This shortfall of $300 is Realized Loss. So, the accounting treatment is incorrect.

D.

The correct accounting entries are as follows, On 31 Dec 2017,

Cash	$9200
Realized Loss	$300
Fair Value		$8800
Unrealized Gain		$700