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 Topic: Available-for-sale securities ( Topic Closed)
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berry0331
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Joined: 04 Sep 2011
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Posts: 49
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| Posted: 28 Apr 2012 at 20:04 | IP Logged
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Does anyone know the journal entries for this one? and why is the
answer $30,000, not $15,000? :S
Question CPA-00527
The following information pertains to Smoke, Inc.'s investment in
marketable equity securities:
• On December 31, Year 2, Smoke reclassified a security with a
$70,000 cost and a $50,000 fair value from trading to available-for-sale.
• An available-for-sale marketable equity security costing $75,000,
written down to $30,000 in Year 1, had a $60,000 fair value on December
31, Year 2. Smoke believes the recovery is permanent.
What is the net effect of the above items on Smoke's valuation allowance
for available-for-sale marketable equity securities as of December 31,
Year 2?
a. $10,000 decrease.
b. No effect.
c. $20,000 increase.
d. $30,000 decrease.
Explanation
Rule: The transfer of a security between categories of investments shall be
accounted for at fair value. At the
date of the transfer, the security's unrealized holding gain or loss shall be
accounted for as follows:
a. For a security transferred from the trading category, the unrealized
holding gain or loss at the date of the transfer will have already been
recognized in earnings and shall not be reversed.
b. For a security transferred into the trading category, the unrealized
holding gain or loss at the date of the transfer shall be recognized in
earnings immediately.
Choice "d" is correct. The reclassified security is transferred in at fair value
and thus, has no effect on the valuation allowance. The adjustment for the
existing available for sale security would be as follows:
Cost FMV Val. Allowance
Dec. 31, Year 1
75,000 (30,000) 45,000
Dec. 31, Year 2
75,000 (60,000) 15,000
Net Change
0 (30,000) (30,000)
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astone
Contributor
Joined: 23 Mar 2011
Location: United States
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Posts: 91
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| Posted: 29 Apr 2012 at 01:06 | IP Logged
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| Year 1 |
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| DR: |
Unrealized loss on available for sale securites |
45,000 |
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| CR: |
Valuation account - Asset contra account |
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45,000 |
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| Year 2 |
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| DR; |
Valuation account - Asset contra account |
30,000 |
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| CR: |
Unrealized gain on available for sale securites |
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30,000 |
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The net effect on the valuation allowance is a decrease of 30,000. The valuation account had a credit balance of 45,000, that decreased by 30,000. The account balance is 15,000. |
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JuniorBazinet
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Joined: 28 Apr 2012
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| Posted: 29 Apr 2012 at 02:14 | IP Logged
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wool1
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Posts: 44
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| Posted: 22 Jun 2012 at 10:58 | IP Logged
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the way it's worded it should be 15000 increase .
what does Question CPA-00527 mean? Is it becker?
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