Question

At December 31, 2021, Jeter Corporation had the following debt securities that were purchased during 2021, its first year of operation:

Fair Unrealized Cost Value Gain (Loss) Trading Securities: Security A $ 85,000 $ 65,000 $(20,000) 15,000 20,000 5,000 Totals $100,000 $ 85,000 $(15,000) Available-for-Sale Securities: Security Y $ 70.000 $ 80,000 $ 10,000 Z 85,000 55,000 (30,000) Totals $ 155,000 $135.000 $(20,000) All market declines are considered temporary. Fair value adjustments at December 31, 2021 should be established with a corresponding charge against Income Stockholders' Equity

Answer 1

Jeter Corporation should record an unrealized loss of $15,000 for trading securities and $20,000 for available-for-sale securities on December 31, 2021, affecting income and stockholders' equity respectively.

Step-by-step explanation:

The subject of the question concerns the accounting treatment of debt securities held in an entity's financial portfolio, specifically how to handle fair value adjustments for trading securities and available-for-sale securities. The main answer involves creating a fair value adjustment entry at the end of the reporting period, which in this case is December 31, 2021. For trading securities, the unrealized gain or loss is recognized in the income statement and therefore impacts the net income. In contrast, for available-for-sale securities, the unrealized gain or loss is reported in other comprehensive income and impacts stockholders' equity, as it is considered temporary under accounting standards. This recognition aligns with the concept that the rate of return for an investor can come in the form of dividends or capital gains. In this scenario, Jeter Corporation should recognize an unrealized loss of $15,000 for trading securities and a loss of $20,000 for available-for-sale securities, reflecting temporary declines in fair values compared to their costs.