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I am Larry Walther, this is
principlesofaccounting.com Chapter 9.
In this module we are going
to look at the available for
sale security category of investments and
how to account for those.
First of all, Available for
Sale Securities are reported on
the balance sheet at their fair value.
The accounting is very similar to trading
securities that we looked at in Chapter 6.
There's an important difference, however.
And that is that changes in
value in these investments,
rather than going to
operating income each period,
go to a unique category of income
called Unrealized Gain/Loss.
Other comprehensive income.
So, other Other Comprehensive Income
is now a new term.
It is a unique classification or category
of comprehensive income that's not
part of operating income, it's a separate
category or a unique classification.
Recognized that for trading securities,
the gain or lost or
change in value Went to operating income.
Now we're going to this
other comprehensive income
to reflect the changes in available for
sale securities.
Recognize that most transactions and
events make their way to
the income statement.
Therefore the income statement
is deemed to be all-inclusive.
Historically, once upon
a time many years ago,
accounts dispute income is only
related to current operating concept.
Transactions and
events that were not directly related
to operation might have been charged or
credited directly to stock or is equity
and bypass the income statement entirely.
Companies have a variety of
reporting options related to
other comprehensive income.
It can be reported in
an comprehensive income statement.
This goes beyond just the operating
income that's seen and
what you might consider to be
the normal income statement.
Or other comprehensive
income can be measured and
reported in a separate schedule.
That reconciles the company's
reported operating net income
to the total comprehensive
income of the business.
Let's look at an example now.
This will help clarify, perhaps.
Webster Company acquired
an investment in Merriam Company.
The intent was not for trading, control or
to exert significant influence.
It's classified as available for sale.
It was purchased for $50,000.
We debit the investment account
available for sale securities and
credit cash on the date of acquisition.
Financial statements were
prepared at the end of the month.
Value of the investments declined from
its $10 purchase price to $9 a share and
here's how we're going to do this.
We're going to debit unrealized gain or
loss dash other comprehensive income.
That's that other comprehensive income
component charge that's going to be
offset against our stockholder's equity.
And we'll credit the investment account
available for sale of securities.
The rationale here is that net income
is not affected by these temporary
fluctuations on investments
that we're holding for
more than just trading purposes.
And so we're going to carve them
out into other comprehensive income
rather than floating them through
our normal operating income.
During the next month the stock
jumps up $3 in value so
we have a $15,000 recovery in value.
We're going to debit or increase the
investment account $15,000 and we're going
to credit this other comprehensive
income unrealized gain or loss account.
After the three journal entries,
the investment account has been changed
to be reflecting $60,000 in value,
they give the initial 50,000 minus the
5000 write down plus the 15,000 write-up.
That equals its market value
at the balance sheet date.
And the other comprehensive income has
an adjusted total of 10,000 in credits.
The 5,000 debit from month one and
the 15,000 credit from month two.
Now, the treatment would be
the same even if the available for
sale securities consist of
a portfolio of many investments.
An alternative to directly adjusting
the available for sale securities account
might be to carry a valuation adjustment
account like the allowance for
uncollectable accounts or
something like that that would offset or
increase the investment category.
In my journal entries I just debited and
credited the investment account directly.
That separate valuation account could be
added or subtracted to the Available for
Sale Securities at cost to
bring them the fair value.
It provides the same net results but
it gives additional information on what
the relative differences
are between cost and
market value and it certainly is useful
for tracking tax basis information.
The tax law does not adjust investments to
fair value at each financial state of date
as do the financial accounting.
Now if we had dividend income on this.
Debit, cash, and credit,
dividend income here.
This is in addition to the recording of
the gains and losses that flow into OCI.
The dividend income is considered to
be operating income in this case.
It might be helpful to look at
our example on a balance sheet.
Here we have the available for
sale securities at the end of March,
valued at 45,000.
That was a a $50,000 minus
the $5,000 write down.
And our offsetting debit is shown as
a reduction from stockholders' equity
as accumulated other
comprehensive income or loss.
If we go to the next month
we've got our available for
sale securities at $60,000 and our other
comprehensive income account accumulated
is now carrying a $10,000
net credit balance.
Which increases stockholders equity.
So we're reflecting
the change in value but
we're not impacting the operating income
through the normal income statement.
It's only considered to be an other
comprehensive income account that's
generally regarded as
a It's a direct adjustment
to the equity accounts.
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