Available-for-Sale (AFS) Securities - Online Tutor, Practice Problems & Exam Prep

Available for Sale (AFS) securities are investments intended for sale but not actively traded. Changes in fair value are recorded in Other Comprehensive Income (OCI), distinguishing them from trading securities. When dividends are received, they are recorded as revenue in the income statement. Unrealized gains or losses affect equity but do not impact retained earnings. Upon sale, realized gains or losses are recognized in the income statement, and any related OCI balances must be adjusted accordingly. Understanding these concepts is crucial for accurate financial reporting and compliance with accounting standards.

Purchasing Available-for-Sale Securities

Alright, now let's look into more details and the journal entries for the Available for Sale Securities. So when we're studying these available for sale securities, I want you to notice how similar everything we do is to trading securities. The only difference is that we're going to be taking our changes in fair value into other comprehensive income, okay? So everything else is going to be the same, we're just going to be dealing with other comprehensive income when it comes to our unrealized gains and losses.

Available for sale securities, they're so slightly different from trading securities, they're going to have to tell you if they're available for sale. They have the intent of being sold, but we're not actively trading them like we did with trading securities. Available for Sale (AFS) securities earn income from dividends just like we saw with trading security and changes in fair value. However, notice that these changes in fair value when we haven't sold the investment yet and it's unrealized; that's the main difference.

The classifications for these available for sale securities can be current or long term. They would tell you in the problem whether you're going to show it in the current asset section of your balance sheet or the long term section of your balance sheet. The initial measurement of the stock, just like everything, is going to be at cost. We have to show it at what we purchased it for, and then subsequently, we're going to measure it at fair value just like we did with trading securities, but the difference here, like I said, is that these unrealized gains or losses are going to other comprehensive income. Other comprehensive income, that's where we're going to show the unrealized gains or losses and I'm going to highlight that because that is the main difference here.

So let's go ahead and start with our purchase entry. On November 1st, year 1, ABC company purchased 500 shares of XYZ company common stock at a total price of $40,000. ABC Company intends to sell the investment and classify them as available for sale. It was stated straightforwardly as available for sale. They might even mention something like they intended to sell the investment, but did not classify them as trading securities. So then they're obviously available for sale, because if you intend to sell them, they are not going to be held to maturity.

Here we go, we've got 500 shares at a total price of 40,000. They could have either told you we spent 40,000 for 500 shares or they could have given you a per-share price. For instance, we bought 500 shares at a price of $80 per share. The per share price, given the total spent divided by 500 shares, comes out to $80 per share. They could have structured the information either way, mentioning either the per-share price or the total amount. The important figure for the journal entry? The total amount, right?

In this journal entry, they actually made it a little easier by specifying the total amount. In our journal entry, we would say we would debit our investment, creating this asset investment in available for sale by debiting it for $40,000, and we paid for it with cash. So we would credit cash for $40,000. Now we have this investment in available for sale, it's increasing our assets by the $40,000 but we also paid for it with cash. So our net assets stay the same. We're going to have the same amount of assets for our total assets, as our cash decreases by $40,000 and nothing really changes there. You should be comfortable with that journal entry. Nothing too crazy there. Let's go ahead and move on to the next one.

Dividend Revenue for Available-for-Sale Securities

So just like we saw with trading securities, available for sale securities can also earn dividend revenue when they receive dividends from their investment. So let's check this out. On December 10th, Year 1, XYZ company declared and paid a dividend of $1 per share. So we own 500 shares of the company just like we saw in the previous journal entry times the $1 we receive per share, but we're going to receive $500 in dividends. And this is going to be received in cash, right? They're going to pay dividends in cash and since we own 500 shares, we'll receive $500. So we're going to debit cash for $500 because we're receiving cash and what's going to be our credit here? It's just like with trading securities, we're receiving dividend revenue and this goes to the income statement, okay? This is not the other comprehensive income. This still goes to the income statement.

Remember, only the unrealized gains or losses when we have changes in the fair value, that's what's going to go to our other comprehensive income that's shown on our comprehensive income statement, not just our regular income statement. Okay? So if you don't remember what the comprehensive income statement is, go ahead and type that into the search bar and look up that video. It's going to be very simple. It's going to be a short video just explaining that other comprehensive income. It just has our net income plus some other complicated issues such as these unrealized gains and losses from available for sale securities. Okay?

So one thing I want to note is that this dividend revenue, it's still non-operating. It's not going to be shown at the top of our income statement where we show our revenues from our sales, from our actual core business. No, this is a non-operating thing, we're not an investment bank, we're not in the business of buying and selling investments, this is a side thing that we're doing, so it's non-operating. It will still show up on our income statement, it will just show up at the bottom part where we show other things that we do. Cool? So we received cash of $500, so our assets increased by $500 and our revenue from the dividends increased by $500, so that's going to increase our equity by increasing our net income. Cool? Alright, so that's exactly the same as what we saw with trading securities. Let's go ahead and move on to the next one.

Unrealized Gains and Losses for Available-for-Sale Securities (1)

Alright, so now let's move on to those unrealized gains or losses. This is the difference between trading securities and available for sale securities, but you're going to see the journal entries are essentially the same. It's just where the gains or losses go. So for these unrealized gains or losses, they're going to show up on the other comprehensive income. Okay? So this is stuff that doesn't go into our net income when we show our net income on our income statement. Our other comprehensive income is things that are shown on our comprehensive income statement that also show other details such as these unrealized gains or losses from available for sale securities. Okay? So if the market price of the investment has increased since the last revaluation, we're going to have an unrealized gain, okay. And if you want a better discussion about unrealized gains and losses, I would go back to the trading securities where I talk about it in a little more detail. But for this point, you're going to see that it's exactly the same as what we discussed in trading securities, that these unrealized gains or losses, they're just the changes in fair value since our last revaluation. Okay? So let's go ahead and see this one.

On December 31st, Year 1, XYZ Company stock had a market value of $65 per share. So the market price has changed since we originally purchased our investment. Remember, we purchased our investment of 500 shares for $40,000. So, we had 500 shares at $80 per share originally, totaling $40,000. Now, the price has decreased from 80 to 65. So 500 times $65 per share, that comes out to $32,500, okay? So our investment has dropped from $40,000 down to $32,500. This is a decrease of $7,500 and remember, the change in the fair value is what's important for our journal entry. So, this $7,500, this is the change in fair value and that's the amount of our unrealized loss. So let's go ahead and make our journal entry. Since we want to change the fair value of our investment down from $40,000, remember it had a debit balance of $40,000 because it's an asset, we're going to need to credit it to lower the value. So we're going to credit our investment in available for sale securities by $7,500, and our debit here? Our unrealized loss, right? We're going to debit the unrealized loss, but this is the main difference and this is usually how you're going to have to show it on an exam if you have to show these journal entries for available for sale. All you're really going to have to do is just let the teacher know that you know it's going to other comprehensive income. So you would just have to say that this unrealized loss is going to other comprehensive income. This is generally all you have to do. So it's not so complicated, right? This is very similar to what we did with trading securities. You just have to be explicit so the professor knows, hey, they know that the available for sale securities are going to other comprehensive income. That's the only difference. So there we go. We've got our journal entry, $7,500.

Now I want to note that this other comprehensive income, it's still part of equity and taking a loss in other comprehensive income is still a loss in our equity. So let's go ahead and fill this out. Our investment decreased by $7,500 and our unrealized loss, so the OCI, I'm going to put OCI here, I'll put 'loss OCI', that's decreasing our equity by $7,500, okay? So one of the main things about this other comprehensive income is it's not going into retained earnings. That's the main difference here with these other comprehensive items. They're going to be sitting in their own separate balance where we keep track of these separately from our retained earnings. Cool? Alright, so nothing too crazy there, you don't need to get so far into the details of what other comprehensive income is, just know that these unrealized losses for available for sale securities, they go to other comprehensive income instead of the income statement. Cool? Alright. Let's go ahead and pause here and we'll follow up with these T accounts to keep track of our investment.

Unrealized Gains and Losses for Available-for-Sale Securities (2)

So just like we did with trading securities, we're going to be updating the fair value of the investment based on the changes in the price. So, we're going to have our investment in available-for-sale securities; we'll have a T account for that to keep track of the balance in the balance sheet, and we'll have our unrealized gains or losses that are going to Other Comprehensive Income (OCI). Cool?

What have we seen so far? We started with an investment of $40,000 when we purchased it in the first journal entry, right? Our first journal entry on the previous page, we had our investment account at $40,000, and we just saw in the previous journal entry that the price had decreased, and we had a decrease in the value of the account of $7,500 which went to our unrealized losses on Other Comprehensive Income, right? So, at this point, our investment was sitting at $32,500 as of December 31st Year 1. As of December 31st Year 1, the price had decreased to $32,500. Cool? And this was a loss in Year 1, $7,500 in OCI.

So let's go ahead and move on here with Year 2. XYZ Company stock had a market value of $90 per share. So, remember, we have to keep track of what our previous valuation was, in this case, $32,500, and see what the new value is, and note the changes between them. We had 500 shares at this $90 price, which means our fair value was $45,000 for our investment, right? The previous value, as we saw right there, was $32,500 when the price was $65. So what was the increase here? It increased by $12,500. This is the change in fair value, and that's what we need to put into our journal entry to bring the investment up to its fair value, okay?

In this situation, we saw an increase in fair value, so we need to increase the investment with a debit. Investment in AFS goes up by $12,500, and what's going to be the credit in this case? We still haven't sold the investment, so it's an unrealized gain, right? This is a gain because the price went up, but it's unrealized because we haven't sold it. Unrealized gain, and where does this go? It's going to OCI, right? And that's gonna be $12,500 as well. Our investment and our equity. The equity goes up by $12,500. So this gain in OCI is giving us a $12,500 increase to our equity.

If we go back to our T accounts here, what do we see happening? In this journal entry, we increased the investment by $12,500 and that brought it to its fair value of $45,000, right? We wanted to show a value of $45,000 as of the end of the year because that's what it was worth. And that unrealized gain of $12,500 that went to OCI here.

Now, one more thing that we do when we're dealing with available-for-sale securities is, when we get rid of our available-for-sale securities, we need to get rid of this section of Other Comprehensive Income. Because right now, our Other Comprehensive Income is going to have this balance of $5,000, right? The $12,500 credit minus the $7,500 debit, well, that leaves us with a $5,000 balance in the account, okay? And that's going to be important when we sell the investment. We need to get rid of this Other Comprehensive Income balance, okay? Because it's going to accumulate over years as we hold the investment just like it would accumulate in retained earnings if it was a regular investment or any other type of income, it would accumulate in retained earnings just like with all our net income, but since this is a special Other Comprehensive Income, it's going to be sitting in this other comprehensive section and it's going to have a balance of $5,000 in this case, based on all the changes that we've made to the account.

So let's go ahead and move on to the next video where we're going to talk about the realized gain or loss.

Realized Gains and Losses for Available-for-Sale Securities

Alright, now let's see what happens when we finally sell an available for sale security. Okay? So note that the realized gains or losses for any security, any security that we have, they're always going to show up on the income statement when we have a realized gain or loss. Okay? So if the selling price of the investment the last revaluation, well, we're going to have a realized loss, right? If we sold it for less, well, we got a loss. But if the selling price is more than the last revaluation, well, we're going to have a realized gain, right? We'll have a gain on the sale or a loss on the sale of the investment. So let's see what happens in this case.

On February 12, year 3, ABC Company sold its investment in XYZ stock at a market value of $70 per share. Okay? So remember, as of the last valuation, we had valued it at $90 per share. So the $90 per share, well that was our last valuation. So we were sitting at an investment. Let's go ahead and put our investment here, we had 500 shares times $90 per share that had us at 45,000, right? 45,000 was the total amount in the account in the investment account, so let's put that here. Investment equals 45,000, but what was the cash? What's the cash we're receiving from this sale? Well, that's from the selling price. The cash is going to be the 500 shares times the $70 selling price and that's 35,000, right? 35,000 is the cash selling price, right? So there's going to be this 10,000 that we're dealing with as a difference.

Now when we make our journal entry, I want to show you a couple of things. Remember what I told you about this balance, let me scroll back up to the T account. Remember this balance that was sitting in other comprehensive income? We need to get rid of it. It was sitting as a credit balance in other comprehensive income. We no longer have unrealized losses, right? There's no longer unrealized losses on the OCI. We need to get rid of it because of it. We're getting rid of the investment. We need to get rid of all related accounts. So since it was sitting with a credit balance of 5,000, we need to get rid of that 5,000 credit balance with a debit to the other comprehensive income. So I’m just going to put it here as a debit to other comprehensive income. That's not technically the correct way to do it, but you're not going to have to go too deep in this class of how we handle these kinds of transactions to get rid of it. So that 5,000 is a debit to get rid of the other comprehensive income.

What other things do we know? We know that we received cash of 35,000, right? So we're going to have a debit of 35,000 to cash and we have to get rid of the investment. So we're going to have a credit to the investment for 45,000, okay? So now what we have to do is balance out this equation with one more debit and what's that debit going to be? That debit is going to be another 5,000 for the loss, right? This is going to be the loss on the sale, Loss on the sale of the securities and this is going to the income statement right here. This 5,000 loss, Okay? So remember, the only difference here is that we have to get rid of that other comprehensive income where we had a gain sitting in other comprehensive income. Well, we got to get it out of there. Okay? So we got to get rid of that because it was related to this investment and we no longer have the investment.

So that's it. That's it for this journal entry. Nothing too complicated. It's just that we had to split up not the entire change in fair value, some of that was related to what was sitting in other comprehensive income, okay? So our investment decreased by 45,000 and our cash, we got cash in which was 35,000 So we had a net decrease there of our assets of 10,000, right? Let me get out of the way for the equity behind me. Well, we had the OCI that we got rid of. We had that increase in our OCI and we got rid of it with a decrease of 5,000, and we had the loss which went to the income statement for 5,000 as well. So everything stays balanced here, Okay? So this might even be a little more than you have to deal with when it comes to available for sale securities. I just wanted to give you the whole picture. I doubt that when you learn it in your first accounting class that you're going to have to go into all the details of other comprehensive income. Most likely, your teacher is just going to want you to know that the unrealized gains or losses go through on other comprehensive income and you're not going to have to go into so much detail, okay? So now that you have the whole picture, let's go ahead and try a practice problem.

Reset Company held investments in available-for-sale securities with a fair value of $180,000 as of December 31, 2017. Reset had originally purchased the investments at a price of $152,000 on January 1, 2017. What is the appropriate amount for Reset to report for these investments on its December 31, 2017 balance sheet?

• A. $180,000
• B. $152,000
• C. $28,000 gain
• D. Cannot be determined

Chitty Company often has excess cash on hand to invest. Suppose that Chitty purchases 640 shares of Bang Company common stock at a price of $35 per share. Chitty classifies the investment as available-for-sale securities. This purchase occurred on December 9, 2018. As of December 31, the market price of Chitty stock had increased to $41 per share. Chitty's journal entry on December 31, 2018 related to the investment in Bang Company stock would include:

• A. A debit to Unrealized Gain on the Income Statement for $3,840
• B. A debit to Investments on the Balance Sheet for $3,840
• C. A credit to Unrealized Gain in Other Comprehensive Income for $3,840
• D. A debit to Cash for $3,840
• E. Two of the answers are correct

Here’s what students ask on this topic:

What are Available-for-Sale (AFS) securities?

Available-for-Sale (AFS) securities are investments that a company intends to sell but does not actively trade. These can include stocks, bonds, or other financial instruments. The key feature of AFS securities is that changes in their fair value are recorded in Other Comprehensive Income (OCI) rather than the income statement. This means that unrealized gains or losses do not affect the company's net income but do impact equity. When these securities are sold, any realized gains or losses are then recognized in the income statement.

How are unrealized gains and losses on AFS securities recorded?

Unrealized gains and losses on Available-for-Sale (AFS) securities are recorded in Other Comprehensive Income (OCI). This is different from trading securities, where unrealized gains and losses are recorded in the income statement. The journal entry for an unrealized gain would involve debiting the investment account and crediting an unrealized gain in OCI. Conversely, for an unrealized loss, you would credit the investment account and debit an unrealized loss in OCI. These entries affect equity but do not impact retained earnings.

How are dividends from AFS securities recorded?

Dividends received from Available-for-Sale (AFS) securities are recorded as dividend revenue in the income statement. The journal entry involves debiting cash and crediting dividend revenue. This revenue is considered non-operating income, meaning it is not part of the core business activities. It appears in the lower section of the income statement, separate from operating revenues. Unlike unrealized gains or losses, dividend revenue does not go to Other Comprehensive Income (OCI).

What happens to OCI balances when AFS securities are sold?

When Available-for-Sale (AFS) securities are sold, any related balances in Other Comprehensive Income (OCI) must be adjusted. If there were unrealized gains or losses recorded in OCI, these amounts need to be removed. The journal entry involves debiting or crediting OCI to eliminate the balance and recognizing the realized gain or loss in the income statement. This ensures that the financial statements accurately reflect the realized financial impact of the sale.

How do AFS securities differ from trading securities?

The primary difference between Available-for-Sale (AFS) securities and trading securities lies in how unrealized gains and losses are recorded. For AFS securities, unrealized gains and losses are recorded in Other Comprehensive Income (OCI), affecting equity but not net income. In contrast, for trading securities, unrealized gains and losses are recorded directly in the income statement, impacting net income. Additionally, AFS securities are intended for sale but not actively traded, whereas trading securities are bought and sold frequently.