Exercise 12–12 (continued)
a. June 30, 2019: Recognition of interest revenue
b. July 1, 2019: Any entries necessary upon sale of the Jackson bonds
1) Updating the fair-value adjustment:
Fair-Value
Adjustment
12/31/2018 200,000
Exercise 12–12 (concluded)
2) Recording any reclassification adjustment:
Need to move from a fair-value adjustment of ($100,000) to $0:
Fair-Value
Adjustment
7/1/2019 100,000
Fair Value
Adjustment
Balance on 12/31/2018 $200,000
± Adjustment needed to update fair value ?
Balance needed on 7/1/2019 ($900,000 − 1,000,000) ($100,000)
Fair Value
Adjustment
Balance on 7/1/2019: ($100,000)
± Reclassification adjustment ?
3) Recording the sale transaction:
Requirement 2
2018 2019 Total
Net Income $25,000 $25,000 – 100,000
= ($75,000)
$25,000 + (75,000)
= ($50,000)
$200,000 + (200,000)
Exercise 12–13
Requirement 1
Securities “held-to-maturity” are debt securities that an investor has the
“positive intent and ability” to hold to maturity. Actively traded investments in
Investments in securities available-for-sale are reported at fair value, and
as a combined statement of comprehensive income that includes net income
and other comprehensive income, or (b) as a separate statement of
comprehensive income. Accumulated net holding gains and losses for
securities available-for-sale are reported as a separate component of
shareholders’ equity in the balance sheet.
Requirement 2
Need to move from a fair-value adjustment of $0 to ($20,000):
Fair-Value
Adjustment
2/18/2018 0
Fair Value
Adjustment
Balance on 2/18/2018 $0
± Adjustment needed to update fair value ?
Balance needed on 12/31/2018 ($580,000 − 600,000) ($20,000)
Exercise 12–13 (concluded)
December 31, 2018
Requirement 3
Need to move from a fair-value adjustment from ($20,000) to $10,000:
Fair-Value
Fair Value
Adjustment
2. Investments reported as noncurrent assets.
3. Unrealized gain (or loss) component of income before taxes.
Trading Securities:
Cost Fair value Unrealized
gain (loss)
Security A $ 900,000 $ 910,000 $10,000
4. Unrealized gain (or loss) component of AOCI in shareholders’ equity.
Securities Available-for-Sale:
Cost Fair value Unrealized
gain (loss)
Security C $ 700,000 $ 780,000 $80,000
Exercise 12–15
Requirement 1
Purchase ($ in millions)
Net income
No entry
Dividends
None declared, so no entry
Adjusting entry
Need to move from a fair-value adjustment of $0 to ($15 million):
Fair-Value
Adjustment
1/2/2018 0
Fair Value
Adjustment
Balance on 1/2/2018 $0
± Adjustment needed to update fair value ?
Balance needed on 12/31/2018 ($35 − 50) ($15)
Exercise 12–15 (concluded)
Requirement 2
1) Updating the fair-value adjustment:
Need to move from a fair-value adjustment of ($15.0) to ($20.0):
Fair-Value
Adjustment
12/31/2018 15
Change needed 5
Unrealized holding loss—NI (to balance)……………………………….. 5
Fair-value adjustment ……………………………………………………. 5
Note: the loss included in NI equals the difference between the proceeds ($30
million) and the carrying value of the investment ($35 million). An additional $15
million was recognized in net income as an unrealized loss in 2018, when fair
value decreased from $50 million to $35 million.
2) Recording the sale transaction:
Fair Value
Adjustment
Balance on 12/31/2018 ($15)
± Adjustment needed to update fair value ?
Net income
No entry
Dividends
Adjusting entry
Need to move from a fair-value adjustment of $0 to $8 million:
Fair-Value
Adjustment
1/2/2018 0
12/31/2018 8
Fair Value
Adjustment
Balance on 1/2/2018 $0
± Adjustment needed to update fair value ?
Note: the gain included in NI equals the difference between the proceeds ($110
million) and the carrying value of the investment ($98 million). An additional $8
million was recognized in net income as an unrealized gain in 2018, when fair
value increased from $90 million to $98 million.
2) Recording the sale transaction:
Cash (proceeds from sale)………………………………… 110.0
Exercise 12–17
Requirement 1
Need to move from a fair-value adjustment of $(145,000) to ($170,000):
Fair-Value
Adjustment
1/1/2018 145,000
Fair Value
Adjustment
Balance on 1/1/2018 ($145,000)
± Adjustment needed to update fair value ?