Question

Loreal-American Corporation purchased several marketable securities during 2021. At December 31, 2021, the company had the investments in bonds listed below. None was held at the last reporting date, December 31, 2020, and all are considered securities available-for-sale. Cost Fair Value Unrealized Holding Gain (Loss) Short term: Blair, Inc. $ 512,000 $ 389,000 $ (123,000 ) ANC Corporation 466,000 512,000 46,000 Totals $ 978,000 $ 901,000 $ (77,000 ) Long term: Drake Corporation $ 512,000 $ 576,000 $ 64,000 Aaron Industries 704,000 676,000 (28,000 ) Totals $ 1,216,000 $ 1,252,000 $ 36,000 Required: 1. Prepare appropriate adjusting entries at December 31, 2021. 2. What amount would be reported in the income statement at December 31, 2021, as a result of the adjusting entry

Answer 1

Appropriate adjusting entries for available-for-sale securities involve adjustments in the equity section of the balance sheet under accumulated other comprehensive income (AOCI) to reflect unrealized gains or losses. No amount is reported regarding unrealized gains or losses in the income statement, as these are reported in other comprehensive income.

Step-by-step explanation:

The question involves preparing the appropriate adjusting entries for marketable securities at December 31, 2021, and determining the amount to be reported in the income statement for unrealized gains or losses.

For securities that are classified as available-for-sale, unrealized gains and losses are included in other comprehensive income and not reported in the income statement. However, they do influence the balance sheet through adjustments to the accumulated other comprehensive income account.

To prepare the adjusting entries for Loreal-American Corporation, you must recognize the unrealized gains and losses in the equity section of the balance sheet under accumulated other comprehensive income (AOCI).

• Debit Loss on Investment in Available-for-Sale Securities (Short term) $77,000
• Credit Accumulated Other Comprehensive Income $77,000
• Debit Accumulated Other Comprehensive Income $36,000
• Credit Gain on Investment in Available-for-Sale Securities (Long term) $36,000

On the income statement, no amount will be reported regarding unrealized holding gains or losses on available-for-sale securities, because these amounts are reported as part of other comprehensive income, which is not included in the income statement but rather is reported directly as an adjustment to equity.

Answer 2

Loreal-American Corporation

1. Adjusting Journal Entries;

Debit Unrealized Loss: Short-term Investments $123,000

Credit Investment in Blair Inc. $123,000

To record the unrealized loss on Investment in Blair Corporation.

Debit Investment in ANC Corporation $46,000

Credit Unrealized Gain: Short-term Investments $46,000

To record the unrealized loss on Investment in ANC Corporation.

Debit Investment in Drake Corporation $64,000

Credit Unrealized Gain on Long-term Investments $64,000

To record the unrealized gain on Investment in Drake Corporation.

Debit Unrealized Loss on Long-term Investments $28,000

Credit Investment in Aaron Industries $28,000

To record the unrealized loss on Investment in Aaron Industries.

2. Amount reported in the Income Statement at December 31, 2021 from the adjusting entry:

Unrealized Loss on Short-term Investments $77,000

Unrealized Gain on Long-term Investments $36,000

Unrealized Loss on Available for sale Investments $41,000

Step-by-step explanation:

Cost Fair Value Unrealized Holding

Gain (Loss)

Short term: Blair, Inc. $ 512,000 $ 389,000 $ (123,000)

ANC Corporation 466,000 512,000 46,000

Totals $ 978,000 $ 901,000 $ (77,000)

Long term:

Drake Corporation $ 512,000 $ 576,000 $ 64,000

Aaron Industries 704,000 676,000 (28,000)

Totals $ 1,216,000 $ 1,252,000 $ 36,000