Hi class, and welcome to 
demo problem number 3 for chapter
12 learning plan 2. Basically this
will be the last video for this learning plan
and I will demonstrate problem 12-2
and problem 12-5, now
I did have it here but
I created this amortization table ahead of time so that
you guys can have a better understanding
of what numbers I'm using
for the interest revenue, when we recorded for problem 3 and problem 
12-2 so the you can kinda see and
understand a little bit better
the way I looked at it was, this is the
best way that I can 
help you understand that. Instead of
just showing you what was needed to be
done
so basically once we get there, I'll show you guys what I mean once I get to the requirement
3
like I was going to say before, your
homework assignment is
problems 12-2 and problem
12-3
and problem 12-2 is going to be consisting of trading securities, which
is what we're doing
problem 12-3, which is in your 
homework, your graded homework, and I believe its also in your practice homework
its on securities
available for sale and the accounting
will be
very similar to that of the trading
securities
so it is accurate
if you are saying that problem 12-2 is going to be done 
the same as 12-3, so to save a little time, I won't go over 12-3
because it will primarily be the
same, exactly the same, so if understand
12-2 and you have this
amortization table, and of course
along with
this demonstration video and the
practice homework
I'm sure you will understand it. so basically 
that's what I wanted to stress before
we move on. but okay so let's start out
if
this will be
problem 12-12, excuse me
12-2 and it's on page 715
and I'll read the problem and then we will go ahead 
and do the problem together
you might notice problem 12-2
has the same scenario as problem 12-1, which is what we already
did in first demonstration video but the
12-1 was on securities
held to maturity, so the accounting for
that is a little different
but because this is for trading
securities
the market value, or market yield rate
does, in fact, influence the interest that is going to be
recorded so that is the difference here and
like I said
before, with the securities available for sale. 
the market yield is also important so that's
why
that's what I told you that the trading securities
and securities available for sale, the accounting is
primarily the same for both, which is why 
I'm not demonstrating 12-3
Let me just fix this
If you are doing the homework practice problems for 12-2 and 12-3,
the problems, you can skip to
problem
5 if you want to do it practice
homework
you may go ahead, but I did take it out for the 
assigned homework for problem 12-2 and 12-3
okay so continuing on, Fuzzy Monkey
Technologies Inc, purchased a short term
investment, eighty million
of eight-percent bonds dated January 1st
2013. Management intends to calculate the
interest in the short term active
trading portfolio
for bonds of similar risk and maturity, the market yield is 
10 percent. the price paid for the bonds is 66 million.
Interest is received semi-annually on June 30th
and December 31st. Due to changing market
conditions, the fair value of the bonds on December 31st 2013 was
70 million.
Okay, so for requirement 
1, we are to compare the journal entry to record Fuzzy Monkeys 
investment on January 1st 2013. 
So our journal entry will be a debit to investment and
bonds at the ace amount of 80 million.
and I'm going to basically,
and I believe,
connect requires that you do it this way
and it will be in millions, I'll just denote that up here.
Numbers are in the millions. So all these
numbers will be in millions
I'm going to show you it this way because the other problem, 12-1, 
I showed you the full, instead of saying in millions, and just doing
8 or 8.million, 
I did it when I'm throughout the whole
number so I'm going to do it
where I'm going to do 8.1 or 6.4 and so on, so that you can 
kind of tell what connect is expecting of you
when you do the homework, okay, and you'll know 
what is expected once you do practice
problems
and same goes for your graded homework
it's going to be exactly the same as that, so hopefully this will help.
okay and then our discount, we have to record that because
the bonds are sold at a discount, which is our difference
and I won't put that in yet, and then the cash
that we paid
paid price of bonds, so okay, the price of the bonds were
66 million, so our discount
then was
14 million dollars, okay. so that is requirement 1
Requirement
2, in requirement 2
we are going to prepare the 
journal entry to Fuzzy Monkeys, by Fuzzy Monkey to record interest on June 30th
2013 at the effective rate. So this is the time
interest is going to be paid to 
the bondholder and so we're going to credit a 
debit cash, which is going to be 4% of the
80 million. It's, remember 
they yield 8%, but because we are calculating interest semi-annually, we're 
gonna take half of that 8% which is now 4%. And then we are going to
debit the discount
on investment and then we're going to credit interest
reveneue
Now interest revenue is going to be 5%, excuse me, 5%
of the 66 million
So let me just do that here..
Make sure that you have decimals in here, because it's going to have a decimal when you're dealing 
with such large numbers
and then my interest revenue is going to be the 5% of the
66 million. Alright, so my difference then is going to be
the discount of
once again, of .10
or, remember these numbes are in millions
so that would be 3.2 million, this will be 100,000
and that will be 3.3 million. Okay so that's how that one looks.
 
Requirement 3, it's asking us to
and just let me do something here..
Alright, so in requirement
3
It's asking us to prepare the journal entry
by funky monkey to record interest in
December 31st 2013
at the effective rate, okay so here's where the amortization table comes in
and I'll show you which numbers to
use
or how to do it. So basically you can do it two ways
Let me just get my accounts in here first. I'm going to just
this here. because I know it's going to be the same.
but this one's going to be a little different. 
My interest is going to be
5%.
of
the 66
plus the 100,000
or
you can take this balance here. so that's
the balance that we are calculating
interest on, the 72045
and hopefully that is what we're doing, okay, hold on here. I didn't double check 
this earlier, well let's do this here. 4%
times 80. 
Let me just get my decimals in here
let me just
cross check my numbers. 
okay so let's double check our numbers, I had to go back and fix a few things here.
apparently I had, I was using the incorrect,
when I created the table I was using the incorrect interest, so I went back and 
fixed everything
so basically let's double check our numbers, so if we took
if we take 5% times
that number which should be the 66
plus .1 here, which is the 66 million 
plus that discount here, it should equal
the 3.31, okay so 3.31 
that 5 is just rounded to a 1 here, so basically that's how that looks like
so hopefully you
understand that so that 66 plus .1
or that discount of the bond investment, you can do it that way
it's easier, if you do have an amortization table, but
if you don't you can always 
go 66 plus .1, 
and then 66 plus .1, plus .11
if you were to do the discount of the interest on June 30th, 
2014 and this is supposed to be 
13 here. there we go
and so this is interest at December 31st 2013
Alright, so that's that one
okay, requirement 4
scroll down a little bit
K in requirement 
4, it asks: "At what amount will Fuzzy 
Monkeyy report its investment in the
December 31st 2013
balance sheet, and why? Prepare any entry necessary to achieve
this reporting objective. 
So first of all, I want to just say that Fuzzy Monkey 
reports its investment in the December
31st 2013
balance sheet at its fair value of the 
70 million dollars for this case
and for investments in trading
securities
the changes in the market value or the
market returns,
it provides an indication of management success
in deciding when to acquire the
investment,
when to sell it, whether to invest in
fixed rate or variable rate securities, and whether to invest in
long-term or short-term securities. 
So with that being said, we first then need to determine the investment
amortized cost or the book value and the
end of the year for
requirement 4. So investment in bonds, we will have then
this is how it is going to look on the balance sheet. 
you're going to have your investment in bonds. Okay let me just go in here.
of the 80 million
Less a discount of 
count of bond investments
is basically the 
discount total of 40 million minus
the 100,000
minus be 110,000 here
okay, that should take us to
and let's just put decimals in there, again
there we go. Should take us to 13.79.
okay I just put a negative in there so
that it kinda shows the investor that he needs
the subtraction, the amortized cost 
then, is 
6.21 at that time. alright, so
then to record it at fair value, 
we would increase the investment
by
the 70 million. minus that 
66.21 that we just calculated and
therefore we would get to 3.79 million
so our fair value
adjustment
then, entry would be
3.79 and we would
credit the net unrealizable or unrealized
holding gains and losses
which is the 70 million
minus the 66.21. 3.79
So that is our entry for this particular requirement.
this is the amount that Fuzzy Monkey will report in the investments at 
December 31st 2013
our journal entry, and once again
because these are traded securities the
unrealized holding gains
of the 3.79 would be recognized in Fuzzy Monkey's
2013 income statement. So that's that one for 12-2.
hopefully you got a better understanding of trading securities
like it said the securities
available-for-sale accounting
will be the same as this, so if you
follow along with this
for 12-3 you should also do perfectly fine. 
if you have questions go ahead and email me
but for now let's get to 12 -5. okay
so here's problem 12-5
and it's on page 716. I'll go through and read the
problem and we'll go through it together. alright so the following
selected transactions relate to investment activities of Ornamental
Insulation Corporation. The company buys
securities, not intending to profit from short-term 
differences in price, and not necessarily to hold that securities to maturity
but to have them available for sale when circumstances warrant.
Ornamental's fiscal year ends on
December 31st
No investments were held by Ornamental on December 31st 
2012, so they gave us a bunch of 2013 and 
2014 transactions.
Let me do requirement 1 first
Requirement 1 is to prepare the appropriate journal entry for each transaction or event during 
2013, okay.
Type here, requirement 1, okay.
So February 21st
The acquired distribution transformers corporation commonshares costing 
400,000, so we can debit
investment in distribution
transformers shares
in the amount of
400,000
and we can credit cash, because it looks like we paid cash
you can assume we paid cash 
since they didn't state anything else, then on March
18th, they receive cash
students of 8,000 on the investment and distribution transformer commonshares
so we're going to debit cash
for the 8,000 amd credot
investment revenue for 8,000, okay.
On September
1st, they acquired 900,000 of american instruments 10%
bonds at face value, so once again
investment in american instrument
bonds
we paid cash to 900,00
October 20th
they sold the
distribution transformer shares for 425,00. so we sold some
investments and we're going to get cash in, so we're going to debit cash and we're going to 
take the investments of the american 
bonds out, excuse me, the distribution bonds
shares. and we're going to credit. 
it looks like there's a gain because we bought it for 400,000 and we sold it for 
425,000.
so we got 425,000 off of it. bought for 
400,000 so our gain, then, is going to be 25,000
on November
1st, we purchased and then M&D
corporation common shares costing 1.4 million
so investment in M&D
corporation shares
100,
1.4 million and credit cash
for that same amount
alright, so here are the transations. 
I'm going to highlight them so that you guys can see them 
a little better, kind of just looks like 
a cluster to me.
alright, hopefully that looks a little better. and then December 31st
record any necessary adjusting entries 
relating to the investment. the market price
of the investments are
american instruments bond is 
850,000,
m&d shares 1.46 million
okay so for this
I'm going to kind of scroll down a bit
Okay. Oh boy, there we go.
So I'm going to go ahead and make a table
first. Basically, well before we do
the table I'm going to record
interest first, because that inestment
for the American Instrumental bonds
here, even though we bought it in September and
interest has not yet been paid but at
the end of the year we have to accrue
interest for that
even though it hasn't been paid, we technically did earn the interest revenue
so we have to accrue interest for that amount. Let's denote it as
*muttering to self*
to revenue. Okay so that revenue is going to be
based off of the 900,000 times 
10%, times
4/12, because only 4 months have passed 
so that is the interest that we would
record
and that gives us 30,000
so it's saying that this
entry, it's saying that we've earned 30,000 interest revenue
even though they haven't paid us, we have to accrue
interest for that amount so that our balance sheet, excuse me, 
our income statement is correct and our net income is correctly stated
okay now another thing that we have to
do is
the, we have to adjust either 
gains or losses based on the
m&d corporation 
shares and the American instrument bonds, because they are not held to maturity
and they are available for sale or
trading securities
we must go ahead and adjust them to 
market value at the end of each reporting period.
so to show you step by step on how we do
this
okay I'm going to go ahead and make a table first
so my available for sale securities is the m&d
coproration
shares, and the American
instrument
bonds. My next column is going to be the cost
and then my fair value, spell it out, 
and then my accumulated unrealized
gain
or loss.
okay
so here's our table
so we got our cost, 
we got our fair value, 
just make this a little bigger, there we go. okay everything still looks good
let's just save it. Okay, so the cost of the m&d corporation shares was 
1.1 million, and the cost of the 
American Instrument bonds is 900,000
my fair value, it states in the book, at that time 
for the m&d is 1,460,000
and for american institute bonds
is 850,000 at that point in time.
Okay, so my gain or my loss here is going to be my fair value
minus my cost, so I have a gain for the m&d corporation shares of 60,000 
and I have looks like a loss
of the American Instruments bonds of 
50,000. so if I net my two together, okay,
my adjustment 
for the fair value adjustment is going to be 
10,000 dollars. so my entry there, and I'm going to
debit fair value adjustment 
were 10,000 and then I'm going to 
credit my net unrealized holding
gains and losses, other
companies income of 
10,000, okay. alright
so that's what we do for requirement 1
for December 31st 2013
so remember that that 10,000 dollars here
the credit balance in that net
unrealized holding gains and losses
is reported as 2013
OCI, which is 
other comprehensive income in the statement of comprehensive income
and it serves to increase accumulated
other comprehensive income, a component of shareholders
equity in the 2013 balance sheet.
okay, so that's that one. 
I'm going to continue down, just keep scrolling down
hopefully that when you print it, I
think what I'm going to do is that 
I'm going to go ahead and do this too, so
that when you print it
it's all one page, well
let's see here, let me go down.
I'll fix all this though, so that when you print it 
it comes up nicely, hopefully, okay.
so that's that. Requirement 2
indicate any amounts that ornamental
insulation report in 2013 balance sheet and income statement 
as a result of these investments
alright so requirement 2, 
the first thing that's going to, that
they have to do
is on the income statement, they had
investment revenue
8,000 and the 30,000
so they'll have to report that
Okay, so remember from
March 18th here
that 8,000 and then the 30,000 for the interest here
that's what they're going to be reporting on the income statement under investment 
revenue
and also that gain
on the sale of investments. Even though
let's see, where is it, ah yeah right there, 
so that's what they're going to be doing
on the income statement
and just a note that, unlike for trading securities, 
unrealized holding gains and losses are
not included 
in the income for securities available for sale
available for sale and then for the
statement
of comprehensive income
the net
unrealized holdings
holding gains and losses
on investments is at
10,000 that we just calculated here
okay, so that's going to be the income statement
here for that 38 and 25, and then the statement of comprehensive income, they're going to 
report ten thousand dollars
alright on the balance sheet
this is how it's going to look like
our assets, current assets, we've got the investment
revenue
receivable of the 
30,000. we've got our securities
available for sale
that 2., which is 
oh and I forgot to throw these out, that's probably why
Let's do this here, oh nope undo
right here and right here
there's our 2.3, okay
so that the securities
available-for-sale 2.3 million that's
going to be
reported in the balance sheet, that's how it's going to look like plus the 
fair value adjustments
of the 10,000 so we'll have
this reported
as such
and then for the shareholders
equity section
this is how the the net unrealized holding gains and losses will look like
which is the 60,000
minus the 50,000, 10,000 
from above, so that's the balance sheet area
so let me just kind of highlight that so you can kind of see
I'm going to get a lighter color in there
and then the income statement,
I'm gonna kind of do this so you can kind of see the difference there from requirement 2. so just remember that
the statement of comprehensive income
okay it can be reported as a combined
statement of comprehensive that includes net income
and other comprehensive income or as a
separate statement
of comprehensive income, this aera right here
alright, so that's that for
requirement 2, keep scroling down
me time
for requirement 3, prepare the appropriate
journal entry for each transaction
or event in 2014
so in 2014 we've got 5 different transactions
January 20th
on January 20th
they sold m&d corporation shares for 1.485
million, so if we sold our investment we're going to be 
debiting cash for the amount
we're going to
debit a gain on the sale because taht's when we have a gain
let's make this a little bigger
did I say debit, I meant credit. Every time we have a gain, it's a credit. A loss is a debit. And then we're going to take the 
investment off the books
at the cost amount, because it's supporting that cost of 1.4 million
so that's all that looks like, alright on March 1st
they received
semi-annual interest of the 45,000 on the investment american 
instrument bonds. okay, so we receive our 
investment, we're going to record that 45,000 as cash
we're going to debit, excuse me, 
credit investment revenue receivable
for that 30,000 that we recorded above, because 
remember earlier, we had to accrue interest here
okay even though we did not
receive interest in, or interest payments in, 
because it's year end and we have to make adjusting entries
we had to accrue for the 30,000
technically
earned but have not yet received in cash, so because we already put it in a 
receivable account
at the time when we actually receive the
payment
we're going to reduce that receivable 
and then credit cash for that
30,000 plus the investment revenue
for the, from 
and this investment revenue here is only from January
through to March, okay
or actually for only two months, January and February
because it was paid on March 1st, so
for that 30,000
oops, nope, it would be this minus that
for the 15,000
let's highlight this so we all have a good idea of where our entries are
so right now if you look at this investment
revenue receivable account, it should be at a 0
at first we debit it, saying that we've got that 
coming in, showing here investment
revenue, the receivable account
its gonna come in at one time or another
and when it came in
we credit so credit and debit equals 0
so we technically be passion 25 out
which is that 30,000
accrued at the end of the year plus the couple months that
we didn't actually accrue for yet
because it's not year end, so because we get the payment of interest before year end
we would record those two months, reduce that receivable 
for that 45,000
on August 12th
and let's just make sure, okay
August 12th, we, hold on here 
acquired vast communication common shares costing 650,000
so we're going to debit an investment account
in the amount of
650,000
let me just copy and paste all these over here
I just want to make sure that they're
all in order, so that doesn't confuse you later on
and then we're going to credit cash with that same amount
didn't change anything
okay
you're still good
and then as of September 1st
September
1st, they received
semi-annual payments
on interest and forty-five thousand
dollars
on the investment in american instrument bonds
so
once again we're going to debit cash for 45,000
and investment
revenue for
45,000
okay so that's September 1st
and now it comes to December 31st
where we have to make our adjustment entries
we're going to record any necessary adjusting entries relating to the inestment
and the market prices of the investment are
vast communication shares is 670,000 and american
instrument bonds is 830,000
okay alright
once again we've gotta make that adjusting entry for
the
let's see here, which investment was it, yep the 
american instrument bonds
so our entry will be then the same thing as up here, so
I'll go ahead and copy that, here we go
the 30,000
remember earlier because 
interest is paid on the first and 
also paid on March 1st, March 1st and September 1st
because once again year-end yea we must make this adjusting entry to
accrue for interest that we have earned
but yet received, every year December 31st 
you can say that every year until these bonds mature, we're going to make 
this adjusting entry, same way, four months 
every single time, alright, and then once again we have to do the same thing here
right here okay so what I'm gonna do is
I'm going to just copy this down
but the names are going to change for the
securities
we've got the vast communications
shares, and we've got 
american instrument bonds, okay alright so this one is at 650,000
fair value states in the book that vast
communications 670,000 and
834 american instrument bonds
alright so far
this is what we have, and this must be
2014 here, okay, so far
we've got vast communications and we've got american instrument bonds
they both cost, well vast costs 650,000
american instrument bonds cost 900,000, the fair value as of December 31st
2014
is 670,000 for vast communications
and 830,000 for american instrument bonds. The gain,
we have a 20,000 for vast communications and the,
there's a loss on the american instrument bonds of 70,000. That means that we're at 
50,000 negative right now okay. So
let me just write here, or write this. We're  going to be moving from
a positive 10,000
which is for the previous year that we had earlier, that we did 
the problem with the two investments, 2013
to a negative 50
thousand
so basically
this requires a decrease
of 60,000 in our
fair value adjustments
alright, so let me just lay this down here
our balance needed in the fair value 
adjustment will be
60,000, excuse me, 50,000
our existing account balance
in the fair value adjustment right now
holds 10,000
the increase
or decrease needed in the fair value adjustment
will be
60,000 based on the 50,000
plus the 10,000
okay
alright
so we determined that this year we've
got
a loss of a fifty thousand
on our investments, but from last year in that 
fair value adjustment account, we've got a 10,000 positive in there
so to move that 10,000 
all the way to a negative 50, we have to adjust it
for 60,000 dollars
so my entry would be a debit to a net unrealized
holdings, holdings and gains
and losses
and this would be on the other comprehensive
income section for 60,000
and then my fair value 
adjustment
which is calculated above for the
60,000
alright
and just a little note on this again, the 60,000 debit credit, 
excuse me this 60,000 debit balance in
the
net unrealized holding gains and losses
is reported as
2014 other comprehensive income
in the statement of comprehensive income
and it serves
to decrease accumulated other comprehensive income, a component of 
shareholders equity in the 2014 balance sheet from the 
the 10,000 dollar credit balance
is shown on
2013 balance sheet to the 50,000 debit
balance it shows in the 2014  balance sheets so that's that for
that requirement 3
so hopefully you can print this out 
and follow along for your graded homework, alright
requirement 4, and this will be the last requirement for this problem
indicate any months that ornamental insulation would
report in 2014 balance sheet and income
statements
as a result of these investments
so same thing as we did before, that had asked us 
in requirement 2 here
okay all right so requirement 4, in the 
income statement, we will have 
investment revenue
which is the 15,000 plus the 45,000
plus the 30,000
alright
that 30,000 is this right here
of the accrued interest that have not
yet been received but 
we have to record, the 45,000 for the
cash investments
now when
interest was paid and then the 15,000
for the partial interest that we
accrued through March 1st
for the other investment, I believe that is the
american instrument bonds
so that is our investment revenue
and then gain on
the sale of the investments
for that 85,000 
and that is, where is it now?
we sold the m&d corporation shares and we had a gain of
85,000
and
then under the statements of comprehensive income
we've got a net unrealized
holding, gains,
and losses on investment
and it was that 60,000 recalculated
here, that's that one
alright in the balance sheet that's all for that income statement
in the balance sheet just
let me highlight this
in a balance sheet we've got then under current assets
there are investment
revenue receivable 
for that 30,000
right there, right here
and we've got our our securities available for sale
I'm gonna put this over here
of the
1.55 million, and that was
where is it now, right there. okay that's both of our securities
there and we're going to then subtract
the fair value adjustment of that 
50,000, woops not 5, 50, so that's going to 
equal then, 1.5 million
after subtracting the fair value
adjustments
and then for the shareholders
equity, we've got the
accumulated other comprehensive income
which is
net unrealized holding
gain and gains and losses
which is basically that 20,000 minus
the 70
of the 50,000
which was calculated here
okay alright
now I believe that's it
let me just make sure I highlight this
so you can see it once you print it out, so that's what we haev for 
problem 12-5, requirement 4
your homework problem assigned to work problem
will be very similar to this, you will have practice problems very similar 
to this as well
so make sure you fully understand it before you go ahead and attempt that graded homework
I will attach this to the video so you have the notes
I'm gonna go in to make sure that
when you print this
no, don't do that to me
okay, well anyway
I'm gonna figure it out before I post it
but this is it
this will be the last video for this
learning plan and once you are done
with this
you can go ahead and there's a test for this learning plan along with the 
previous learning plan
so the test will involve chapter 6 and chapter 12, if you have any questions 
make sure to give me an email, 
shoot me an email or call me
