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Homework answers / question archive / Elaina Company has the following investments as of December 31, 2017: Investments in common stock of Laser Company $1,500,000 Investment in debt securities of FourSquare Company $3,300,000 In both investments, the carrying value and the fair value of these two investments are the same at December 31, 2017 Elaitus stock investments does not result in significant influence on the operations of Laser Company
Elaina Company has the following investments as of December 31, 2017: Investments in common stock of Laser Company $1,500,000 Investment in debt securities of FourSquare Company $3,300,000 In both investments, the carrying value and the fair value of these two investments are the same at December 31, 2017 Elaitus stock investments does not result in significant influence on the operations of Laser Company. Elaina's debt investment is consid ered held-to-maturity. At December 31, 2018, the shares in Laser Company are valued at $1,100,000; the debt investment secun ties of FourSquare are valued at $2,500,000. Assume that these investments are considered impaired. Instructions (a) Prepare the journal entries to record the impairment of these two securities at December 31, 2018. (b) Assuming the fair value of the Laser shares is $1,400,000 and the value of its debt investment is $2,950,000, what entries if any, should be recorded in 2019 related to impairment? (c) Prepare the journal entries at December 31, 2018, assuming these securities are not impaired. (Ignore interest revenue entries (a) Assume that the debt investment in FourSquare Company was available-for-sale and the expected credit loss was saman Prepare the journal entry to record this impairment on December 31, 2018. *E17-23 1101
Answer : The purchase of a marketable security is initially recorded at cost. At acquisition, companies must classify their marketable securities into three groups, based on their type (debt and equity) and on management’s intent to hold the security. These include:
*. Held to maturity: Securities purchased with the positive intent and ability to hold to maturity. This category only applies to debt securities because equity securities, by definition, do not have maturity dates.
*. Trading: Securities bought and held principally to be sold in the near-term. Trading securities are held usually by financial institutions and similar entities, and typically have a holding period measured in hours and days rather than months or year
*. Available for sale: Securities that do not meet the criterion to be classified as held to maturity or trading.
As available for sale securities are sold, any difference between the purchase price and the sales price is reported in earnings. Securities held are adjusted to the fair value of the investment on the reporting date. Recognizing that fair value adjustments may cause volatility in an entity’s operating earnings ,these “unrealized holding gains/losses” to be reported in other comprehensive income (OCI).
1. Journal entries for impairment at 31-12-2018
Impairment loss a/c dr 400000$
To investment in Laser Co 400000$
(being asset impaired)
FVT PL dr 400000 $
To impairment loss A/c 400000$
(Being loss on impairment transfered to profit nad loss account)
Impairment loss on Debt Instrument DR 800000$
To Investment in Foursquare 800000$
((being asset impaired)
FVTOCI DR 800000$
To Impaiment Loss A/c 800000$
(Being loss on impairment transfered to profit nad loss account)
1. Journal entries for impairment at 31-12-2019
Investment in Laser Co dr 300000$
To Reversal of Impairment 300000$900
Investment in Foursquare dr 450000$
to Reversal of Impairment loss 450000$
Reversal Of impairment Loss dr 750000$
To Profit and loss 300000$
To FVOCI 450000$
3. No Journal entry will be passed in this case
4. a.) Impairment loss A/c dr 900000$
To Investment in Foursquare Ac 900000$
b.) P&L dr 900000$
To Impairment loss Ac 900000$
