[vodrldnr]

52. When preparing a draft of its 2005 balance sheet, Mont, Inc. reported net assets totaling $875,000. Included in the asset section of the balance sheet were the following:
Treasury stock of Mont, Inc. at cost, which approximates market value on December 31 $24,000
Idle machinery 11,200
Cash surrender value of life insurance on corporate executives 13,700
Allowance for decline in market value of noncurrent equity investments 8,400

At what amount should Mont’s net assets be reported in the December 31, 2005 balance sheet?
A. $851,000
B. $850,100
C. $842,600
D. $834,500

can someone plz explain “Allowance for decline in market value of noncurrent equity investments” ?????

answer :a

[Bnots]

They're talking about the account used to report available-for-sale securities at fair value. There are different names used for it. I learned it as “securities fair value adjustment.”

Dr. Unrealized holding G/L – OCI 8,400
Cr. Securities fair value adjustment 8,400

The investment in AFS securities remains on the books at cost, but — in this case — one would subtract the fair value adjustment (the allowance) to report those securities at fair value on the balance sheet.

In this problem, since it's already included in assets, no adjustment to net assets (equity) is needed because of it.

[vodrldnr]

I am confused because there are sum different terms used in this problem from what I've learned.

so. .

” subtract the fair value adjustment (the allowance) ” => is this unrealized holding loss (OCI) ?

or is it reclassification ?

unrealized holding gain is reported under OCI (net of tax)
reclassification for AFS is subtracted from underlined holding gain (net of tax)

and the reclassification amount (before tax amount) will be part of income from continuing operation…

this is what I know about AFS ..

is there something I am missing ???

[Anonymous]

I know this part is a bit confusing, so let me draft it out in a bigger picture. When a company purchases a security, they can consider it as a trading investment or an available for sale investment. If it is a trading investment, you have to adjust it to fair market value at year end. If it is an available for sale investment, you can elect whether to report it at fair market value or not. If FMV is elected, it is reported just as trading investment, but if you dont elect FMV method, then other rules apply. Now, if you dont elect the FMV, you have to report something called Unrealized gains or losses in other comprehensive income (OCI). But companies are allowed to create an account called “allowance for losses” to cushion such an unrealized loss, and works almost exactly as allowance for accounts receivable. It is adjusted at year end and it is taken completely out only when you sell all those securities. I considered it just as an Unrealized gain or loss account but in the balance sheet.

[vodrldnr]

Example of Available for Sale Securities

For example, Plasma Storage Devices buys $10,000 of equity securities, which it classifies as available-for-sale. After one year, the quoted market price of the securities drops the total investment value to $8,000. In the following year, the quoted market price of the securities increases the total investment value to $11,000, and Plasma then sells the equity securities.

Plasma records the decline in value in the first year with the following entry:

Debit Credit
Loss on available-for-sale securities (recorded in other comprehensive income) 2,000 Investments – Available-for-sale 2,000

Plasma records the increase in value in the second year, as well as the sale of the investment, with the following entries:

Debit Credit
Investments- Available-for-sale 3,000
Gain on available-for-sale securities 1,000
Loss on available-for-sale securities (recorded in other comprehensive income) 2,000

Debit Credit
Cash 11,000
Investments – Available-for-sale 11,000

https://www.accountingtools.com/available-for-sale-securities

This is the J/E I know about AFS …. am I missing something ?..

[vodrldnr]

@Loo, so the normal transaction i know is

unrealized holding g/l(OCI) XXXXX | AFS XXXXXXX

BUT now it seems like

unrealized holing g/l oci xxxx | security fv adj(allowance) xxxxx

so.. my understanding so far is ..

company can choose one of two J/E method ..

and if company choose to report like the second one

unrealized holing g/l oci xxxx | security fv adj(allowance) xxxxx

they put security fv adj(allowance) right under AFS account on B/S ? just like Account receivable with Allowance ????

am I getting it ?? or am i TOTALLY GOING to wrong way?

[Anonymous]

Yes, I believe you use the allowance only if they say they keep an allowance account for AFS. If they dont mention an allowance account, you can hit AFS directly. Usually they keep it as an allowance account because they can adjusted it constantly without touching their main investment value during times of constant price fluctuation. Consider that if they have it as AFS, they might probably hold if for more than one year, Therefore, many adjustments might be done before they sell the security. They might not want to adjust the account up and down all the time before they sell it; Moreover, an allowance account would be ideal. I also believe that Allowance for investment account is not a GAAP requirement, but please double check me on that.

[vodrldnr]

@Loo, thank you so much. I totally agree. If I directly take off AFS from its acquisition cost, it is kind of against GAAP. since FV should be based on Exit value, NOT entry value. also basically, SFAC5 sates that Investment is reported at their FV. Therefore AFS (investment) must be presented as its fair value. the way to show the AFS at its fv is to use allowance so that the user for F/S can clearly see its fair value from F/S ? …

[Anonymous]

Yes, just let me keep these facts straight for you for testing day. Allowance for investments is an election and not a requirement, just as AR, companies can elect the direct write off instead of the allowance method. In order to arrive to FMV, you substract investment with the investment allowance account. Allowance for investment is only for AFS and hold for maturity securities. The question in the test will tell you which method they use.

[vodrldnr]

@Loo, thank you so much. I really appreciate your help! A lot of questions use really confusing terms…

[Anonymous]

@vodrldnr I am not surprised. I have been through that. When I went over the whole Wiley CPA course and did all their multiple choice questions, I landed a 74. It was my first CPA test ever. Then I bought another package of MCQs, and did around 2200 multiple choice questions. At that point, I walked into the test with no possibility of element for surprise and knocked it out of the park, and thats probably the key to nail these tests.

[vodrldnr]

@Loo, I failed one time for FAR (score 64) and preparing for second round. my study material is also Wile. the CPA excel Exam review.

Now, I am reviewing it over and over again to understand every single things in the book and I am expecting that I will finish to review this book in this week.

After finishing it up, I think about getting other books for MCQ … do you have any suggestion ???

[Anonymous]

Dont get another book, do not over-read. I just went through videos once (books can replace the lectures) and got a general idea of every topic. Do not worry if some concepts do not stick in your head. It wasnt until I spent 72 hours in Ninja MCQ when I started to connect the dots for this test. Write down the answers that you got wrong in a notepad, be careful to write the concept instead of the whole answer. By the time I had went through 2000 mcqs, I had already around 500 concepts to go over day and night.

[vodrldnr]

@Loo, just review wiley agin and agin, making notepad for wrong answer. thank you so much.

I was thinking about ninja MCQ after Wiley ..

what material did you use except for wiley ???

[Anonymous]

Just wiley and ninja mcq. I did ninja mcq for a total of 76 and 2200-2300 multiple choice attempts. Not a single mcq I havent seen after that. I like NINJA mcq more than Wiley questions because they are closer to the actual exam questions.

[vodrldnr]

@Loo, thank you so much.. I really need to win this monstrous test ..

Can I ask you one more question about study materials ..?

sometimes, I really have hard time to find related study material

like right now, I am studying current cost accounting and constant dollar accounting. but wiley and my textbook (which is written in my first language) do not give me in depth understanding and materials…

what supplements good for me ??? thinking about ninja note ..

[Author]

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