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The Janjua Company had the following account balances at 1/1/18: Common Stock $65,000 Treasury Stock (at cost) 13,400 Paid-in-Capital in Excess of Par 82,000 Investments in AFS Debt Securities 40,000 FVA (AFS) 1,500 credit Retained Earnings 22,000 On that date, the Accumulated OCI account was at its proper balance. There were no sales or purchases of Common Stock or Investments during 2018. Prior to any adjusting journal entries related to the investments, 2018 Net Income was $10,300. No other transactions affecting Retained Earnings occurred. Fair Value of the Investments at 12/31/2018 was $40,000.Required:a. Prepare the 12/31/18 journal entry to adjust the investment to fair value.b. Prepare the complete 12/31/18 Equity section of the balance sheet.

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anthougo

Answer:

The Janjua Company

a) Journal Entry:

Debit FVA (AFS) $1,500

Credit Unrealized Gain on Investments $1,500

To record the unrealized gain on AFS investment.

b) Equity Section of the Balance Sheet as of December 31, 2018:

Common Stock                                $65,000

Treasury Stock (at cost)                     (13,400)

Paid-in-Capital in Excess of Par         82,000

Retained Earnings                              32,300

Total Stockholders' Equity             $165,600

Explanation:

Retained Earnings:

1/1/18 = $22,000

Net income = $10,300

12/31/18 = $32,300

FVA = The Janjua Company's Funding Valuation Adjustment is the contra account of Investments where The Janjua Company adjusts the value of investments at the end of the account period.  When the value of the investment reaches $40,000, the unrealized gain is debited to the FVA account.  This effectively reverses the credit balance and restores the investments to the adjusted balance of $40,000.

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