A company has investments in debt securities classified as available-for-sale. The January 1, 2020 balance sheet carries these investments, originally purchased at a cost of $3,700,000, at $3,750,000. To protect against anticipated declines in the value of these investments, the company takes a short position in stock index futures, at a price of $3,745,000, that are highly correlated with the value of its investments. The futures qualify as a fair value hedge of the securities investment. No margin deposit is required. When the books are closed on December 31, 2020, the market value of the investments is $3,730,000, and the company closes out its short position at the futures price of $3,727,000.
Required
a. Prepare the entry to record closing the futures, and the adjusting entry required at December 31, 2020. The company records all income effects in financial gains (losses).
b. At what amount will the AFS investments appear on the company's December 31, 2020 balance sheet?
c. The company sells the AFS investments on January 5, 2021 for $3,728,000. Prepare the journal entry to record the sale.
d. What is the total net gain (loss) on holding the securities and the hedge? How much of this gain (loss) is reported in 2020? In 2021?

Question

Quizplus · Accepted Answer

The Answer of A company has investments in debt securities classified as available-for-sale. The January 1, 2020 balance sheet carries these investments, originally purchased at a cost of $3,700,000, at $3,750,000. To protect against anticipated declines in the value of these investments, the company takes a short position in stock index futures, at a price of $3,745,000, that are highly correlated with the value of its investments. The futures qualify as a fair value hedge of the securities investment. No margin deposit is required. When the books are closed on December 31, 2020, the market value of the investments is $3,730,000, and the company closes out its short position at the futures price of $3,727,000.
Required
a. Prepare the entry to record closing the futures, and the adjusting entry required at December 31, 2020. The company records all income effects in financial gains (losses).
b. At what amount will the AFS investments appear on the company's December 31, 2020 balance sheet?
c. The company sells the AFS investments on January 5, 2021 for $3,728,000. Prepare the journal entry to record the sale.
d. What is the total net gain (loss) on holding the securities and the hedge? How much of this gain (loss) is reported in 2020? In 2021?

A Company Has Investments in Debt Securities Classified as Available-For-Sale