Ladybug Inc began operations in 2004 and maintains long-term investments in available-for-sale securities. The year-end cost and market values for its portfolio follows. Prepare journal entries to record each year-end market adjust for these securities.


December 31, 2004
400,000 (Cost)
425,000 (Market Value)


December 31, 2005
435,000 (Cost)
410,000 (Market Value)


December 31, 2006
585,000 (Cost)
625,000 (Market Value)


December 31, 2007
610,000 (Cost)
665,000 (Market Value)

How do I go about completing this problem? Thanks for your help!

hint. Available for sale securities are recorded based on their market value at the end of each year. Any gains and or losses due to market appreciation or deline would be recorded as unrealized gain or loss depending on the current market value. The gains or losses would only be realized when the AFS is sold.

Ok... I have something, but it just seems too easy. Is this correct or am I missing something? And since this year end, do I need to do something else? Thanks!

December 31, 2004
Debit unrealized gain for 25,000
Credit market adjustment for 25,000

December 31, 2005
Debit market adjustment for 25,000
Credit unrealized gain for 25,000

Available-for-Sale securities are not reported as unrealized gains and losses on the income statement. That's what you do with Trading Securities. For AFS they actually go into the equity section of the balance sheet. That is something I'm not terribly familiar with but it's something to do with some "compensating balance" or something. Is this actually an intermediate class, because you shouldn't have to do this for a principles class.

But anyway, you need to look up the name of the account that is actually used for those gains and losses in your book. It may be the same account name, but is not on the income statement. But other than that, I can tell you how to deal with the math, and the logic behind the debit & credit. (It'll work whether it's income statement or balance sheet, cause revenues and expenses are credits and debits, respectively, because of their effect on equity, so it still must work if going through equity.)

You're thinking backwards. 2004 -- first, a gain is like income. Is income a debit? Second, securities are assets. What is the normal balance of an asset and what is crediting going to do to it? You're wanting the value to go up.

2005 -- I don't like the way they're relisting cost. They're making it confusing. The only interpretation I can make of this (mostly cause it's the only way you can really do it), is that you have to keep track of the cost and the market adjustments separately.

i.e. at the end of 2004 you have 400,000 original cost and 25,000 additional value.

Then for 2005, the cost is 435,000. That means they had to have purchased 35,000 more in securities. If this includes the 425,000 re-valued amount from 2004, they cannot call it "cost." So it has to include the original 400,000, and an added 35,000.

However, it didn't go down 25,000. Because you had added value of 25,000 in there also. So if you add 35,000 to the cost portion, and you still have the 25,000 added value portion, you actually have 460,000 by the end of 2005. So it lost 50,000 of value. It's the only reasonable way I can see to do it, given the limited info they're giving you. If 435,000 is COST, it cannot include that extra 25,000.

As for the entry, you again are backwards. What will a debit do to an asset account? And the value went down. Is that a gain?

Ok... this is what I finally got.

12/31/04
Debit Unrealized Gain-Equity 25000
Credit Market Adjustment-AFS 25000

12/31/05
Debit Market Adjustment-AFS 50000
Credit Unrealized Gain-Equity 25000
Credit Unrealized Loss-Equity 25000

12/31/06
Debit Market Adjustment-AFS 65000
Credit Unrealized Loss-Equity 25000
Credit Unrealized Gain-Equity 40000

12/31/07
Debit Market Adjustment-AFS 15000
Credit Unrealized Gain-Equity 15000

Quote:

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Originally Posted by charity4684

Ok... this is what I finally got.

12/31/04
Debit Unrealized Gain-Equity 25000
Credit Market Adjustment-AFS 25000

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Please go back and re-read the part about debits and credits. A gain is not a debit. Gains increase equity. How do you increase equity?

And when the company is investing in another company, that is an asset. You're trying to increase the value of that asset. How do you increase an asset?