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9 - Available-for-Sale Securities - YouTube
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[Music]
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I'm Larry Walther this is principles of
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accounting comm chapter 9 in this module
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we are going to look at the available
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for sale security category of
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investments and how to account for those
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okay first of all available for sale
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securities are reported on the balance
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sheet at their fair value the accounting
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is very similar to trading securities
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that we looked at in chapter 6 there's
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an important difference however and that
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is the changes in value in these
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investments rather than going to
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operating income each period go to the
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unique category of income called
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unrealized gains or losses other
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comprehensive income so other
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comprehensive income is now a new term
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it is a unique classification or
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category of comprehensive income it's
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not part of operating income it's a
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separate category or unique
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classification recognize that for
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trading securities the gain or loss or
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changes in value went to operating
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income now we're going to this other
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comprehensive income to reflect the
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changes in value for available-for-sale
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securities recognize that most
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transactions and events make their way
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through the income statement therefore
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the income statement is deemed to be
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all-inclusive
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historically once upon a time many years
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ago accountants viewed income is only
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relating the current operating concept
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transactions and events that were not
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directly related to operations might
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have been charged or credited directly
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to stockholders equity and bypassed the
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income statement entire
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companies have a variety of reporting
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options related to other comprehensive
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income it can be reported in a
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comprehensive income statement this goes
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beyond just the operating income that's
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seen and what you might consider to be
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the normal income statement or other
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comprehensive income can be measured and
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reported in a separate schedule that
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reconciles the company's reported
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operating net income to the total
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comprehensive income of the business
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let's look at an example now this will
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help clarify perhaps a Webster company
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acquired an investment Myriam company
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the intent was not for trading control
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or to exert significant influence it's
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classified as available for sale it was
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purchased for $50,000 we debit the
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investment account available-for-sale
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securities and credit cash on the date
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of acquisition financial statements were
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prepared at the end of the month value
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the investments declined from its $10
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purchase price to $9 a share and here's
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how we're going to do this we're going
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to debit unrealized gain or loss - other
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comprehensive income that's that other
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comprehensive income component charge
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that's going to be offset against our
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stockholders equity and we'll credit the
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investment account available-for-sale
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securities now here is that net income
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is not affected by these temporary
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fluctuations on investments that we're
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holding for up for more than just
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trading purposes and so we're going to
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carve them out into other comprehensive
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income or rather than flowing them
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through our normal operating income
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during the next month the stock jumps up
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three dollars in value so we have a
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fifteen thousand dollar recovery and
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value we're going to debit or increase
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the investment account fifteen thousand
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and we're going to credit this other
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comprehensive income unrealized gain or
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loss account after the three journal
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entries the investment account has been
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changed to be reflecting sixty thousand
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dollars in value that you the initial 50
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thousand - the five thousand write down
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plus the 15 thousand write up
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that equals its market value at the
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balance sheet date and the other
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comprehensive income has an adjusted
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total of ten thousand and credits the
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five thousand debit from month one and
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the fifteen thousand credit from month
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two now the treatment would be the same
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even if the available-for-sale
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securities consist of a portfolio of
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many investments and alternative to
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directly adjusting the
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available-for-sale securities account
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might be to carry evaluation adjustment
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account like the allowance front
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collectible accounts or something like
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that that would offset or increase the
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investment category and my journal
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entries I just debited and credited the
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investment account directly that
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separate valuation account can be added
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or subtracted to dividable for sale
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securities it cost to bring them the
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fair value it provides the same net
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results but it gives additional
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information on what the what the
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relative differences are between cost
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and market value and it's certainly
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useful for tracking tax basis
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information the tax law does not adjust
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investments to fair value at each
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financial statement date as do the
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Financial Accounting rule if we have
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dividend income on this debit cash and
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credit dividend income here this is in
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addition to the recording of the gains
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and losses that flow into OCI the
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dividend income is considered to be
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operating income in this case it might
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be helpful to look at our example on a
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balance sheet here we had the
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available-for-sale securities at the end
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of March valued at forty five thousand
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that was the fifty thousand minus the
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five thousand right now and our
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offsetting debit is shown as a reduction
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from stockholders equity as accumulated
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other comprehensive income or loss if we
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go to the next month we've got our
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available-for-sale securities at sixty
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thousand and our other comprehensive
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income account accumulated is now
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carrying a ten thousand dollar net
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credit balance which increases
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stockholders equity
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so we're reflecting the changes in value
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but we're not impacting the operating
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income through the normal income
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statement it's only considered to be an
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other comprehensive income account
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that's generally regarded as a direct
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adjustment to the equity accounts
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