 Hello and welcome to the session this is Professor Farhad in which we would look at CPA questions that deal with an important topic on the exam and that's investments. This topic is also covered in intermediate accounting. What is the difference between my lectures what I offer you and your traditional CPA course such as Becker, Wiley, Roger, Gleim? Well what I do is I teach you the material. I don't assume anything so in my courses I teach you what you need to know. I fill the gaps that you are lacking since college or the material that you forgot since college. So that's the difference between what I do in a CPA course. You would still need your CPA course. All what my supplemental material would do is help you fill the gaps so you do much better on your CPA exam and utilizing your CPA course. I'm going to remind you to connect with me only then if you haven't done so please check out my website. I have 1800 plus accounting, auditing, tax, finance as well as Excel tutorials. If you like my lectures please like them and share them. If they benefit you they might benefit other people. Connect with me on Instagram. This is the website that I'm telling you about. If you go to my website you subscribe you'll have access to all the material. For example this topic is covered in my intermediate accounting investments and I cover this topic much much in details than any other CPA course you can have. That's the difference. We're talking about two different things. The CPA course assume you know this. I don't assume anything. And I have many CPA material over 2000 CPA questions a lot of material that comes with your subscription. I strongly suggest you check out my website. Let's take a look at this question and to answer. Questions about investments. When you answer questions on the CPA exam it's very important to know what you don't know. So when you answer a question, if you know it that's good but that's not real value. If you know something you should know it. It doesn't add any value to you. When you answer a question and you cannot answer it or you answer it incorrectly. That's the feedback that you want. It means you don't know this topic. It means you have to zoom in on this topic, learn it so you are ready for your CPA exam. So when you get something wrong that's where you really get the benefit. It's a signal telling you look CPA candidate. You don't know this topic. So let's go ahead and answer these questions. Now the reason I did not put multiple choice questions here like A, B, C, D is because I don't want you to think that this is a multiple choice. This could be a multiple choice questions. I could give you four options. A, B, C, D. Or I can give you this question in a form of a simulation. What does that mean? So for example, rather than giving you the schedule, I can give you three separate schedules. One for trading securities, one for available for sale. Or I can give you the purchase orders or the original transaction. For example, you purchase this security at 385,500. I can show you the transaction. So I can give you this information in more than one format. The point is any format you are giving the information as long as you understand what you are being told, it should not matter whether this is multiple choice or assimilation. So let's take a look at this question. Thomas purchased several investments and that security is during 2020 in its first year of operation. The following information pertains to these securities. So rather than saying the following information pertains to these securities, I can give you a different exhibit, one for health to maturities, one for trading and one for available for sale. Just showing you what they purchased them at. And I can show you maybe an exhibit from the newspaper or from Yahoo Finance showing you what the market value at the end of the year rather than giving you this information clean cut. The fluctuation of unfair value are not considered permanent. That means there is no impairment permanent impairment loss. What balance sheet amount should Thomas report for the total of its investment and bonds 1231 2020. And we have to be very careful. We have to be very careful because I could ask you 15 different questions about this exhibit. So you have to be careful what you are being asked here. The question is simple. What is the total of the investment and bond? So you have health to maturities. You have trading bonds and you have available for sale. What is the total? Well, what you need to know here is how are bond reported on the balance sheet? That's the second thing you need to know. Well, how are bond reported? Well, you need to know that available for sale, available for sale and trading securities are reported at fair value while health to maturities are reported at amortized cost. And we have to be very careful. We are dealing with year 2020. So what does that mean? Well, let's start to add add up our investments for the year 2020. Let's start with health to maturities. Health to maturities. We have the fair value for 2020. We have the fair value for 2021. We have the amortized cost of 2020 and the amortized cost of 2021. So they're giving you two different years. The year that you're looking for is 2020. And from all these four numbers, since this is available for sale, you're going to choose the amortized cost for year 2020. So this is the first figure 385,500 plus trading securities. Again, you're giving fair value for 2020 fair value for 2021 and cost. Well, for trading securities, we don't worry about the cost. We're not looking for 2020. Therefore, what's left is the fair value of, sorry, we're not looking for 2021. We are looking for the fair value of 2020. Therefore, we're going to add 63,000, 65,000 and 62,000. And those are the fair value for the bonds for the trading bonds available for sale. The same concept would report them at fair value and for looking for 2020 fair value. So we're not looking for 2021. And we don't care about the cost plus 160,400. So you notice this could be a long problem. This is, I would say this is most likely will be given to you in a form of assimilation. And they will try to give you, I can give you three different exhibit. Same information. I just gave you one exhibit. Give me the total investment in bonds. Well, if I add everything up, let's go ahead and add everything up. See what the answer is. So we're going to take 385,500 plus 63,000 plus 62,000 plus 65,000 plus 160,400. And that's going to give us in total 739,000. This doesn't make any sense because they have 400 and 500. Oh, I did not put the 400 and 500 plus 900. So that's going to give us, let's go back and redo the math. So the amortized cost 358,500, 63,000 plus 62,000 plus 65,000 plus 160,400. The answer should end up with 900. Yes, 735,400, 735,900. And the reason the answer did not make any sense to me. I mean, this is from my experience as an accountant. Notice I'm adding a number with that ends with 400 and 500. My answer should end up with 900. And that's why it did not make any sense. The others were ending up with zeros. So that's the answer for this question. Let's take a look at this question. So again, we're giving a bunch, basically the same information with different numbers. It doesn't matter. Basically the same thing, the same what's giving. What would be the balance in Thomas accumulated other comprehensive income with respect to the investment in 2021? So here, first of all, we are dealing with 2021. That's one. Two, we are being asked, what is the accumulated other comprehensive income balance? So let's zoom in to what we need to know. First, we have three classes of investments and bonds. We have health to maturities, trading and available for sale. The first thing you need to know is which one of them is goes into comprehensive income? Which one of these end up the effect of it end up in comprehensive income? Well, it's not held to maturities bound because those are reported at amortized cost. It's not trading securities. They are reported on the income statement. So what we're dealing with is available for sale securities. Available for sale securities are the securities that end up and accumulated other comprehensive income, any changes in those. So we're looking for 2021. 2021. So what I'm going to do. I can figure out 2021 real quick. But what I'm going to do, I'm going to go through the whole process to show you how we end up with an answer like this. And by doing so, you would learn how to also do mark to market investments. So here's what happened. You have this bond, LMN bond. You purchased it for 152 and 2020. The value was 150,400. So here's what happened in year 2020. That's not the year we're looking for, but we're looking for 2021. But I'm going to go through it year by year. So you're going to have in year 2020, you're going to have to make an adjustment. And this adjustment, part of it, it's going to be fair value adjustment. And part of it, it's going to be unrealized holding gain slash loss equity. So you're going to have those two accounts. And those two account is where you make all your fair market value adjustments. So for year one, here's what happened in year one. The, your investment went down by $1,600. It means you have a loss for year one for year 2020. You should show a loss of 1,600. Well, year one is easy because you don't have any prior balance. Well, if I have a loss, it means I have to have, I have to have a fair value adjustment of a credit balance. Now I have a zero balance. I need to show a credit balance of 1,600 because this is what I have a loss because when I credit fair value, I have to debit unrealized holding gain or loss. Well, let's credit, let's credit fair value. So for year one, since your prior balance is zero, I'm going to credit fair value adjustment, 1,600. Therefore, my I'm going to put this balance 2020. Therefore, if I credited fair, if I credited fair value adjustments, I'm going to debit unrealized holding gain or loss. And now it's a loss. I have a loss of 1,600. That's year 2020. Now what happened from 2020? What happened from year? Because this is cumulative. What happened from year 2020 to 2021? Well, in year 2021, the, the market went up. My value was 1,5400. Now the fair market value is 1,6300. Well, what does that mean? Well, it means I have to make an adjustment. I have to make an adjustment. So I'm going to show you this on a timeline. It's very important to see this on a timeline because when you see this on a timeline, it makes more sense to you. Okay. So here's what we are stating. Here's what we are stating on a timeline. This is what things would look like. You started your investment at 152,000. It went down. It went down to 150,400. So this was the first adjustment and we lost 1,600. And this is what we have for year 2020. In year 2021, the investment went up to 1,6400. Well, what does that mean? It means you have to find the adjustment is you have to find the difference between this figure and we move to the right. When we move to the right, it means we have a gain for that year. We have a gain. We gained doesn't mean we have a gain. It means we gained. It means we gained relative to the prior year. I mean, what do I mean by this? We could have moved from 1,5400 to 151. It would still be a gain, but overall we would have a loss. Here what we did is we have a gain and we turn positive. So you have to understand this. And this is what I explained in my lessons. I explained these topics in detail. So let's see what happened here. What is the total? What's the total change from the prior year? 1,64300 minus 1,50400. So we moved to the right 13,900 unit. We moved to the right 13,900 unit. That's how much we moved to the right. Now that's not the question though. The question is what is the balance? So if they were asking for the adjustment. So there we go. First, let me clarify this. The answer is not 13,900. If they were asking, if the question asked, what is the adjustment? For year 2021, the adjustment would have been 13,900. What do I mean by this? What it means for year 2021, I will need to debit fair value adjustment. I will need to debit fair value adjustment. 13,900. And I will need to credit unrealized holding gain or loss. 13,900. And next to those, I'm going to write adjustment. If they ask you about the adjustment, the adjustment would have been 13,900. So I moved 13,900 to the right. But that's not the question. The question is what is the balance? Well, now we can find the balance. Well, now let's find the balance. So we draw a line here. We had a credit balance of 1,600. Now we have, now we debit this balance 13,900. So what's the balance? The balance and fair value adjustment is 12,300. And what's the balance and unrealized holding gain or loss 12,300? Now this is the balance. And this is what they are asking about. Well, let's check to see if that balance is correct. Well, let's see. I have bonds that I purchased at 152,000. And now they have a value of 164,300. What should be my balance? I should have a gain of 12,300. Do I have a gain of 12,300? I sure do. Now holding unrealized holding, now I have a gain, not a loss of 12,300. And my fair value adjustment is a debit of 12,300. That means I have a gain of 12,300. Therefore my answer is correct. You can double check yourself. What I was trying to do in this exercise is to make sure you understand. They could also ask you, what is the adjustment? The adjustment is 13,900. The adjustment went from 2020 balance to 2021 balance. And this is the adjustment. That's not what they're asking about. Because they could have 13,900 as a potential answer. As a potential answer. So you have to be very, very careful. So let's work this exercise. So basically we're giving the same information, except that we are being asked, what is the unrealized holding gain or loss that we would report in 2021 income statement relative to its investment and bonds? Well, we have three types of bonds, health to maturities. They're not reported on the income statement. Trading securities, they are unavailable for sale. They are not reported on the income statement. They are reported on the balance sheet. Their adjustments is reported on the balance sheet. So we are dealing with bonds trading securities and we're looking for the unrealized holding gain that we report in 2021. Well, how much unrealized holding gain? Well, we have to find the difference between year 2020 and 2021. So what happened to this portfolio between the year 2020 and 2021? Well, let's see what happened in year 2020. Well, if we have this line here, remember we have cost. And this, the cost is, let's add them up 65. Let's add up the cost because it's very important. I want you to see this in details because this is one of the topics that gives students a lot of problems and this is what I can offer you on my website, 41,000 plus 34,900. So your cost is 140,900. This is your cost 100. Let me just make sure I have this fixed. 140,900. Now, what's going to happen is we're going to look at your fair value. So we're going to compare cost. You're going to compare your cost to your fair value. Well, we're looking for the fair value of 2021. So let's see what happened between year, between the cost and year 2020. Year 2020, we had fair value of 50,000 plus 49,000 plus 46,000. So what happened is the fair value went to 145,000, 145,000. So what happened? We moved to the right. 4,000, 4,100 unit. We moved to the right 4,100 unit. So from a journal entry perspective, this is what we do. We have a fair value adjustment and we have the unrealized holding gain or loss account. We moved to the right. It means we have a gain. So we have a debit here, 4,100, 4,100. So this is the adjustment and the balance for year 2020 because we don't have any prior balance. That's why it's easy. So this is the balance. Yeah, this is the balance and this is the adjustment because we don't have anything. This is year 2020. From 2020, we're going to move to 2021. Let's find the balance for 2021. The balance for 2021 are these numbers. 61,500 plus 70,000 plus 40,500 and now we are standing at exactly 172. So we're going to move further to the right because we have a gain. We're going to move further to the right and we are standing at 172. Well, now we need to compute our new value and new adjustment. Well, what happened is this? What is the difference between 172 and 145? Well, that's 27,000. So what's going to happen is in year 2021, we move to the right again. We move to the right again. The total of 27,000 unit. Well, what do we have to do? We have to debit. We have to debit. I'm sorry, we have to debit. Yes, we have to debit this account, 27,000 and we have to credit this account, 27,000. Now the balance, the overall balance, the overall gain is if we count them, that's 31,100 and the total unrealized gain for two years is 31,100. But the question is how much you should report in 2021. I would report in 2021, 2021. I would report 27,000 because this is my change that occurred in 2021, 27,000. Therefore, the answer is 27,000. Again, they could ask me, what is the total and the fair value adjustment? The total is 31,100. That's not what they're asking me. They're asking me, what should I report in my income statement for 2021? If they ask me, what should I report in my income statement, 2020 in my income statement, 4,100. So 4,100 could be one of the answers. If you misread the question and you computed the difference between the cost and 2020, you would have an unrealized gain of this amount. I'd say, oh, I have the right answer. Here's the right answer. Be very careful. Investments is a very tricky topic. I'm telling you this. I can help you. The way I explain this topic, I explain this topic as this is the first time you are looking at it in my intermediate accounting courses. It doesn't matter whether it's in my intermediate accounting or CPA exam because it's the same thing. Check out my website if you need help, additional resources about this topic. You can keep your CPA exam unique. I'm sorry. You can keep your CPA course. You need your CPA course. I don't replace your CPA course. I supplement whether you are taking Glyme, Wiley, Roger, Becker, Sorgent. I can supplement those and help you tremendously to pass your exam. Study hard, good luck, and stay safe.