hello and welcome to demonstration video number 2
for learning plan 2 chapter 12 and this demo
video will be on trading securities I
will be demonstrating exercise
12-4, 12-7,
and 12-8 and this is going to start
on page 706
so what I'm gonna do you like it did
before
is have exercise 12-4 here
12-7 here and 12-8 here so that's how I'm going to do that
so hopefully you have your book with you
follow along and you can also use this to
help you with the assigned homework
as well as the practice homework so let's start with 12-4
try to blow this up a little bit
here let's make it 130
ok there you go alright
in 12-4 on page 706 i lied i meant 706
not 704, there you go
Sha Farm Supplies Corporation purchased
800 shares of General Motors stock at $50 per
sheer and paid a brokerage fee of $1200
two months later this years results were
53 dollars per share
and the brokerage fee on the sale was
1300 prepare
entries for the purchase and the sale
in case you remember that any brokerage fees that were included in the sale is 
also included in that price of those shares
so let go ahead and demonstrate that so for the first journal entry
then for the purchase
we are going to
Call this investment in
GM common shares it doesn't have to
necessarily
be the exact name every company's like I said before is going to be a little
different and then we paid cash
alright so it'd be 1800 shares
times
the fifty dollars per share im gonna
add the $1200 and the
fees, the brokerage fees so that gets us to
$41,200
that's that
one that was for the purchase of the investment
and looks like they sold it
two months later at $53 per share
so if we sold it we know we're going to get cash in so let's say
let's see here, Sale entries
alright so we're going to debit cash cause we know if
we sold in a ? and cash in and that's going to be the 1800 shares
At 
$53 dollars per share but they did also be
have thirteen hundred dollars in the fees
ok so if we do that math it'll come out to
$41,100 we know that we had to take the investment
off the books the investment will be the
same amount as what we paid for
click this before to add costs in our financial statements
so looks like if
it doesn't exactly debits don't
exactly equal credit so we know that we are either going to record a gain or a loss in a 
year so basically since our debits are
lower than credits we know that we have
a loss on sale of investment
and that's basically just going to be our difference
of $100
okay so we had a loss on the investment of $100
um based on this sale right here
it looks a little better
so that's it for 12-4 basically what we did was we 
made an entry for the purchase of some
shares in General Motors and then we go
ahead and be
went ahead in two months later sold the
shares
of course at little higher rate but
because we had some
brokerage fees in there as well this is not a  subtraction
this is an addition, there we go
looks like fees, oh yeah that's right
yup okay so basically we
made the sales for entries for the sale
two months later with the loss of $100
ok so that's that one so let's move onto
12-7 and that's in this next tab
I went ahead and copied down
what was in that exercise already and the exercise is talking about Laureal American
Corporation
they purchased several marketable
securities during 2013
and December 31st 2013
the company had the investments income
and stocks listed below
which is what I have here on the screen
none was held at the last reporting period
December 31st and all are considered securities
available for sale alright so we've got
a few different investments here we got some short term investments for
Blair, Inc.
AC incorporation and then we got some long-term
investments you for Drake corporation 
and Aaron Industries
and because these are all considered
as securities available for sale they have to be adjusted at the end of
each reporting period at it's fair value so
you can see here that each one has the cost
each investment has the cost listed the fair value at the end of that reporting
period
for each investment and then the
adjustments
or the unrealized 
holding fee gain or the loss at the end of each
period okay alright
so let me just kind of lay everything out for you so that you can understand how this 
works
a really good example to look at and if you
need more for the explanation on top of this video if you 
read 661, page 661
it does show you step-by-step on how to do this as well
and the book has good example
on top of this example and hopefully the practice problem and
you'll get a better understanding of this but we're going to be doing now is we're going to be 
looking at each cost
the fair value and then adjusting each
where I'm basically going
in and making and adjusting
entry to the fair value of 
the investments and basically
like that and I just kinda wanna talk a
little bit about 
HTN securities
well unlike HTN securities i want to talk a little bit about
trading securities they are basically carried at the fair value
which is this amount it's carried in the balance sheet
so the carrying value must be adjusted
to the fair value at the end of 
every reporting period and that's what
we're doing here so rather than
increasing or decreasing that investment
account
itself we use evaluation and allowance
account called fair value
adjustment and I'll show you
that we will be crediting that fair value adjustment account in a little bit when we
do the adjustments
alright
so let's go ahead and go in
We know that
because all this information is given to
us we know that at the end for the short
term we know that we have to
do the fair value adjustment for short
terms by
$45,000 and we know that we have to
adjust the long-term investment by
$20,000
okay this'll be decrease
and this will be an increase while basically we can net
them together we get the $45,000 minus the
$20,000 that gives us
a $25,000 adjustment
so we know that we have to based on all
of our investment because they are
trading securities available-for-sale
they have to report at the fair value
and we've already determined that our short
term has to be
decreased by $45,000 and our
long-term has to be increased by $20,000
so basically let's go in and make that
entry so I'm going to debit my net unrealized
holding gains and losses
OCI for the $20,000
$25,000
okay you're going to have to credit my 
fair value adjustment for $25,000
okay so right now
I'll show you my T Account here so that you kinda see what's going on
so for the fair value adjustment
account we got a credit of 
$25,000 okay
so how this $25,000
we'll go ahead and decrease
our comprehensive income it can report it under the comprehensive income section
as other comprehensive income 
or it can be reported as a separate statement
of comprehensive income and that is
basically the answer to number
two, requirement two for
requirement 2 it asks what amounts would  be reported in the income statement
at December 31st 2013 as result of 
the adjusting entry while none of them
none will be reported
in the income statement section okay because
income statements
the income statement
is a separate
statement
from the comprehensive
income statement
so basically
accumulated net holding gains and losses were securities
available for sale are reported as components of shareholder's equity
and accumulated other 
comprehensive income and changes in the balance sheet
are reported as other comprehensive income
or loss in the statement of comprehensive income rather
than as part of earnings so this statement can be reported either as
so basically A as they come by
I'm gonna write this down for you here
as a combined statement of comprehensive
income that includes net income
and other comprehensive income or
B 
it can be reported as a separate statement
of comprehensive
income okay so that's basically what we do for 
this exercise we were looking for
how to adjust a fair value adjustment based on 
fair values given for that ending reporting period
we adjusted the investments based on
what we came out with and we
came to the conclusion that that $25,000
will not be reported in the 
income statement at the end of December 21st, 2013
but it can be reported
at a combined statement of comprehensive
income that includes net income and
other comprehensive income
or as a separate statement of
comprehensive income
so that's that one alright moving on to 12-8
12-8 is on page 707
right
on February 18 2013 Union Corporation purchased 10,000 shares
of IBM common-stock as a long-term investment
at sixty dollars per share on December
31st 2013
and December 31st 2014
the market value of IBM stock is $58
and $61 per share
respectively requirement one is asking
what is the appropriate reporting category for this investment
and why?
Okay so first of all I guess I can write this down so you
requirement one the statement
can be
reported either as a 
a combined
statement of comprehensive income
that includes net income 
and other comprehensive income or B
like before, previous one as a 
separate statement
of comprehensive income
and remember that
accumulated net holding gains and losses
for security available for sale are reported as a separate component
a shareholders equity and the balance sheet and just a little more information on
the
securities that are held to maturity they are
debt securities than an investor has or 
in mind the positive intent and
ability to hold that 
investment till maturity okay
actively trading investments in debt or
equity securities acquired principally
for the purpose of selling them 
in the near future are classified as
trading securities
so basically the IBM shares are neither yet
classified
at available for sale since all investments and debt in equity securities
that didn't or don't fit the definition of other reporting
categories are classified this way and of the course the equity and method 
is inappropriate either because 10,000
shares of IBM
certainly don't constitute significant influence
so basically that was requirement one and then requirement two then
(noise)
Okay I'm gonna try to make this a 
little bigger and requirement two 
they're asking for prepare the adjusting entry for December 31st
2013 okay
So add December 31st, 2013 the shares were initially bought at $60
but at the end of December 31st, 2013 
the market value states $58
so we know that we have to
decrease the fair value adjustment by
20,000
the way I know that is because was it
initially bought at
$60 and now it's at $58
that means
there's a two dollar difference
so I've got to debit next unrealized 
gains and losses
is for $20,000
10,000 shares at
two dollars a share
remember we have to
credit fair value adjustment
for $20,000
so this is our
requirement 2 adjustment
for the
market value amount at $58
cost was $68 but because fair market value says
$58 dollars, excuse me, cost is $60
the fair market value says $58 we have to adjust it
for the fair market value for $20,000
Requirement
3 prepare the adjusting entry for December 31st, 
2014, so in the problem it says that
at the end of December 31st, 2014 the share were $61 per share
okay so
to look at, to let me just go ahead
do the T 
value for the fair value adjustment account up here so you kind of see what's going on in
the account and
hopefully you understand it better but right now we've got a $20,000
balance in this account
it needs to get to $10,000
and how do we know that it needs to get to $10,000?
Well initially
this is all
alright
okay anyway
okay so in requirement 3 the cost is $60,000
but right now it's at
$61, did I say $60,000? I meant $60
at the end of 2014 it is now $61
so we know that we have a 
one dollar gain
but as of right now we have that adjustment in there as a $20,000
dollar
negative balance, we've gotta get it to
a positive $10,000 okay so the way we would do
this is you would actually 
just wanna do this here
ahh that's not gonna work okay
let's just write it out so the net realized gains
and losses is gonna be 10,000 shares
at
$3
Why is it $3 and not $1?  
Well basically, remember the year before it 
was adjusted to $58 per share now
this year to determine what we need to
have in a fair value adjustment we have to take 
the initial cost which is the $60,000
minus the fair value of
the current year which is than $60 minus the
$61 we have to have $10,000 in there
that's just to find out what we need in
the fair value adjustment
count to find out what our 
so to be able to find out what the
adjustment
account amount will be you gotta take the previous
year fair value amount which is the $58 here
then I can do it here minus the
$61 that would equal $3 okay
equal $3 so that would be the
$30,000 so we would 
credit net unrealized 
holding and gains
oops I meant
this we better, woops
fair value 
adjustment
which is the 10,000 shares $61 minus
$58 for $30,000 alright so right now if you go ahead and put that $30,000
in here okay, from this entry
Oh let's see
I'm just gonna do this so that once you print this out
you can remember how we got that number, ahh get out of there
alright, so I know I need to get to 10,000
I've got 20,000 in this fair value adjustment account right now
and just to double check you know I know
that I was at $58
per share last year for 2013 in 2014, 
it's at $61 that would be a $30,000 adjustment
to my fair value adjustment account
which then equals the $10,000 gain
and the fair value adjustment account so that's how you do that
one so I'm hoping that by the end of
this and hoping reading
the information on page 661
it will help you better on how to understand
this concept hopefully if we had given you 
another big sample for let's see
the next year of 2015
with a market value 
of let's see, $2 from $61
you will understand how to do it so far this is what we're going to have and
so far this is what we have for the trading securities
so basically 12-4 here 
12-7 and 12-
8 make sure that you watch
make sure you go ahead and do the
practice problems before you go ahead
and attempt the graded problem so that's it for this video there is
one more video for this learning plan
It will be involving the
problems 12-2, 3, and 5 and I'll demonstrate that 
in the next video but I will also attach these notes
to the second video so that you will have that for
your reference when you start practice problems or the graded problems.
