Available For Sale Securities

Available for sale securities are those marketable securities which cannot be classified as either trading securities, where the business has the intent to sell in the near future, or held to maturity securities, where the business has the intent to hold the security until a fixed maturity date.

 

Available for sale securities can be either equity or debt marketable securities and are recorded at fair value and are usually classified in the balance sheet as non-current assets, depending on whether the business has made plans to sell the investments in the near future.

Purchase of Available for Sale Securities

When purchased, an available for sale security is recorded at cost including associated fees.

Suppose for example available for sale securities are purchased for 2,000 including fees, then the following double entry bookkeeping journal would be used when accounting for the securities.

Purchase of available for sale security journal entry
Account Debit Credit
Available for sale securities 2,000
Cash 2,000
Total 2,000 2,000

The Available for Sale Securities Decrease in Value

If at the period end the available for sale security has decreased in value, then the investments must be written down to the new value and the unrealized loss charged to the unrealized gain/loss – other comprehensive income account. The unrealized gain/loss – other comprehensive income account is a permanent account reported as part of comprehensive income, a separate component of shareholders equity

Note: This is in contrast to the treatment of unrealized losses on trading securities which are charged to the income statement and included in the earnings of the business.

For example, if at the end of the accounting period the available for sale securities are worth 1,600 and the carrying value on the balance sheet is 2,000, then the following journal is used to record the unrealized loss.

Available for sale securities decrease in value journal entry
Account Debit Credit
Available for sale securities 400
Unrealized gain/loss – other comprehensive income 400
Total 400 400

Following this journal, the available for sale securities are carried on the balance sheet at the fair value of 2,000 – 400 = 1,600, and the 400 unrealized loss has been debited to the unrealized gain/loss – other comprehensive income account in the equity section of the balance sheet. The loss is unrealized as the available for sale securities have not yet been sold.

The Available for Sale Securities Increase in Value

If at the period end the available for sale security has increased in value, then the investments must be increased to the new fair value and the unrealized gain credited to the unrealized gain/loss – other comprehensive income account.

For example, if the investments now increase in value to 2,800 and the carrying value on the balance sheet is 1,600, then the following journal is used to record the unrealized gain.

Available for sale securities increase in value journal entry
Account Debit Credit
Available for sale securities 1,200
Unrealized gain/loss – other comprehensive income account 1,200
Total 1,200 1,200

Following this journal, the available for sale investments are carried on the balance sheet at the fair value of 1,600 + 1,200 = 2,800, and the 1,200 unrealized gain has been credited to the unrealized gain/loss – other comprehensive income account in the equity section of the balance sheet. The gain is unrealized as the available for sale securities have not yet been sold.

It should be noted that the balance on the unrealized gain/loss – other comprehensive income account is 800 (1,200-400), which represents the difference between the original cost of 2,000 and the current fair market value of 2,800.

Disposal of the Available for Sale Securities

When an available for sale security is sold, the difference between the proceeds, the carrying value of the securities, and the balance on the unrealized gain/loss – other comprehensive income account on the balance sheet results in a realized gain or loss.

Using the values above, the available for sale securities are carried on the balance sheet at the fair value of 2,800, the balance on the unrealized gain/loss – other comprehensive income account is 800, and if the proceeds from sale are 2,600, then a gain is realized and recorded with the following journal.

Sales of available for sale securities journal entry
Account Debit Credit
Available for sale securities 2,800
Unrealized gain/loss – other comprehensive income account 800
Cash 2,600
Realized gain on available for sale securities 600
Total 3,400 3,400

The balances on the available for sale securities account (2,800) and the unrealized gain/loss – other comprehensive income account (800) are now cleared, and the realized gain of 600 is credited to the income statement of the business.

It should be noted that the realized gain of 600 is simply the difference between the proceeds of 2,600 less the original cost of the securities of 2,000.

Dividend and Interest from Available for Sale Security

Dividends and interest receivable on available fro sale securities are treated as normal and credited the income statement.

Dividends from available for sale security journal entry
Account Debit Credit
Dividends receivable 120
Dividend income 120
Total 120 120
Available For Sale Securities June 15th, 2017Team

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