Example - Accounting for Fair Value Method securities versus Available for Sale Debt securities

The following transactions relate to ABC Corporation's purchase of bonds from XYZ Company:
1) ABC purchases 1,000 XYZ Bonds on 9/1/20XX for $20 each.
2) The market price of XYZ's bonds at 9/30/20XX is $25 each.
3) ABC sells all 1,000 XYZ bonds on 12/15/20XX for a price of $23 each.

Other facts:
1) ABC's fiscal Q3 ends on 9/30/20XX. ABC's fiscal Q4 ends on 12/31/XX
2) ABC has no other revenues or expenses.
3) ABC's statutory tax rate is 20%

Do the following treating the investment in XYZ as a trading security as well as an available-for-sale
security: a) complete the financial statement effects template; and b) prepare simple income statements
for the quarters ending 9/30/XX and 12/31/XX.
Example of Fair Value Method of Accounting for Securities (a.k.a. "trading securities" method)
Balance Sheet Accounts Income Statement Accounts Comp I/S ABC Corporation
Accumulated Other
Other
XYZ Deferred Retained Comprehensive
Transaction Cash +
Securities
=
Tax Liability
+
Earnings
+
Income (Equity
Income - Expenses = Net Income Comprehensive Income Statement
Income
Account)

1. Purchase 1,000 bonds for $20

-20,000 20,000 0 Quarter-ending 9/30/XX
per share on 9/1/20XX
+ = + + - =

2. Revalue XYZ to current market 5,000 5,000 5,000 5,000 Revenue $ -

price of $25
+ = + + - =
Operating Expenses $ -
2. Record tax expense on 1,000 -1,000 1,000 -1,000 Operating Income $ -
unrealized gain
+ = + + - =
Other Income (Expense) $ 5,000
-2,000 -2,000 2,000 -2,000 Pre-Tax Income $ 5,000
3. Revalue XYZ to current market
price of $23
+ = + + - =
Tax Expense $ (1,000)
3. Record tax expense on -400 400 -400 400 Net Income $ 4,000
unrealized loss
+ = + + - =

23,000 -23,000 = - = 0 ABC Corporation

3. Sell XYZ securities + + +
Income Statement
3. Pay taxes on gain on sale of -600 -600 0 Quarter-ending 12/31/XX
XYZ
+ = + + - =

0 Revenue $ -
+ = + + - =
Operating Expenses $ -
0 Operating Income $ -
+ = + + - =
Other Income (Expense) $ (2,000)
0 Pre-Tax Income $ (2,000)
+ = + + - =
Tax Expense $ 400
0 Net Income $ (1,600)
+ = + + - =

Totals $2,400 + $0 = $0 + $2,400 + $0 $5,000 - $2,600 = $2,400 $0

Total A $2,400 = Total L + E $2,400

Available for Sale Method (Debt securities only)

Balance Sheet Accounts Income Statement Accounts Comp I/S ABC Corporation
Accumulated Other
Other
XYZ Deferred Retained Comprehensive
Transaction Cash +
Securities
=
Tax Liability
+
Earnings
+
Income (Equity
Income - Expenses = Net Income Comprehensive Income Statement
Income
Account)

1. Purchase 1,000 bonds for $20

-20,000 20,000 0 Quarter-ending 9/30/XX
per share on 9/1/20XX
+ = + + - =
Revenue $ -

2. Revalue XYZ to current market

5,000 5,000 0 5,000 Operating Expenses $ -
price of $25
+ = + + - =
Operating Income $ -
2. Adjust for tax on unrealized 1,000 -1,000 0 -1,000 Other Income (Expense) $ -
gain
+ = + + - =
Pre-Tax Income $ -
3. Revalue XYZ to current market
-2,000 -2,000 0 -2,000 Tax Expense $ -
price of $23
+ = + + - =
Net Income $ -
3. Adjust for tax on unrealized -400 400 0 400
loss
+ = + + - =
Other Comp Inc(Exp) $ 4,000
23,000 -23,000 = = 0
3. Sell XYZ securities + +
ABC Corporation
-2,400 - 0 Income Statement
3. Realize gain on XYZ + = + + =
Quarter-ending 12/31/XX
3. Pay taxes on gain on sale of 0
XYZ
+ = + + - =
Revenue $ -
0 Operating Expenses $ -
+ = + + - =
Operating Income $ -
0 Other Income (Expense) $ -
+ = + + - =
Pre-Tax Income $ -
0 Tax Expense $ -
+ = + + - =
Net Income $ -
Totals $3,000 + $0 = $600 + $0 + $0 $0 - $0 = $0 $2,400
Other Comp Inc(Exp) $ (1,600)
Total A $3,000 = Total L + E $600