 Hello, and welcome to the session in which we will solve this CPA exam simulation that deals with debt investments In this simulation, we have a portfolio of debt investments for Adam company and under debt investments We could have three categories health to maturities bonds Trading securities bonds and available for sale bonds. We have three categories We are giving the fair value of Of year x1 the fair value of year x2 amortized cost for x1 and amortized cost for x2 For this simulation, I can ask you 10 to different 15 multiple choice questions Easily or I can give you a simulation and ask you to answer a few questions about the data giving and this in this simulation That's what I will do I'm gonna make it a simulation and I'm gonna ask you three specific questions and those are What balance sheet amount with Adam report for the total investments for the bonds for year x1? What would the balance sheet and Adams accumulated other comprehensive income would be in year x2? And I'm gonna ask you the third question. What total unrealized holding gain with Adam report and x2 income statement notice those questions are considered basically a Simulations for example on the simulation I would ask you to input the number the answer in a box also I can ask you the same questions and give you four multiple choice Simply put any simulation can be turned into a multiple choice or a multiple choice can be turned into a simulation What should you do now? See if you can answer those three questions before I go ahead and start Solving this simulation before we proceed any further. I have a public announcement about my company far hat Lectures comm For hat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley Gleam miles my accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of lectures multiple choice questions through false questions as well as exercises Go ahead start your free trial today. Let's go ahead and start to answer the first question What balance sheet amount with Adam report for its investment in 20? X and at the end of the 20x1 which is December 31st 20x1 So what we need what do we need to know here? We need to know What is the how are the investments reported on the balance sheet? Well, we have three categories of investments again help to maturities Trading and available for sale. What do we need to know about those three? Well, we need to know that for available for sale and for trading securities We need to report the securities at fair market value now. We have to be very careful. We're looking at x1 so the fair value of x1 is Those figures bond 1 bond 2 bond 3 and available for sale bond we report them at fair value How about help to maturities for help to maturities? We report the value at amortized cost So simply put we don't use fair value for the help to maturities We report them at amortized cost and specifically year one or x1 amortized cost What does that mean? It means what's reported on the balance sheet is the fair value of trading securities and fair value of available for sale Plus the amortized cost of help to maturities all in all if we add up these figures 62,000 plus 64 plus 61 plus 160 plus 386 the investment as of December 31st our investment account should show 733,000 assuming my math is right as of 1231 year x1 So you have to be very careful what common what common mistakes a Student can make well rather than x1 you will do for x2, which is incorrect. They're asking for x1 That's the first common mistake Rather than for example rather than using the fair value for the trading some students might use the cost Or they might use the fair value for help to maturity So you have to be careful that that help to maturities are reported at amortized cost Trading securities and available for sale are reported at fair value. So let's answer the second question What would be in the balance of Adams? Accumulated other comprehensive income with respect to these investments as of x2 balance sheet date so we're looking at a OCI accumulated other comprehensive income which account or which securities Affect a OCI with help to maturities and the answer is no help to maturities are reported at amortized cost Therefore, they don't affect a OCI other comprehensive income or comprehensive income How about trading securities trading securities are reported at fair value, but fair value is the corresponding Account is an income statement. So we adjust the income statement. Therefore, they don't affect Comprehensive income or other comprehensive income. How about available for sale and the answer is yes Available for sale securities are reported at fair value But the fair value go to comprehensive income goes to the balance sheet The adjustment is through the balance sheet and from the balance sheet that end up in comprehensive income So we have one bond and with the amortized cost of 15158 the prior year and now the value of that Security is 172,500. How much we should have well if you really think about it the accumulated adjustment So the adjustment that we need to prepare from year x1 to year x2 is how much? Well, if we look at the difference in value, we went we went from 158 to 172 500. We notice That there's an increase in value an increase in value of 14,500 well what entry do we make well the entry that we make the cumulative entry is we have to Make a fair value adjustment. So we're gonna have an account called fair value and in that account. We should have 14,500 debit and the fair value for the fair value the corresponding credit is an account called unrealized gain unrealized gain and Specifically, it's an equity account. It's an unrealized gain or loss, but it's unrealized gain So if the fair value is 14,500 okay, if the fair value should be that much, but how we came up with that fair value I'm you know in other words the fair value should be that much, but you have to understand between year one and year two You know that's the total Okay, so the unrealized gain should be in total also 14,500 so what happened to the unrealized gain equity this account here is closed to to Accumulated other comprehensive income therefore the balance and accumulated other comprehensive income would be 14,500 14,500 now to get there we might have to make two adjustments, which is we're not gonna discuss this because again We can ask so many questions about this entry. Okay, for example, I could have asked you what is a OCI for year one AOC I for year one Was only 2,000 so the adjustment was 2,000 so the adjustment between year one and year two is 12,500 plus the previous 2,000 will give us 14,500 so you have to understand the adjustment for year two would have been 12,500 but that's not what we are asking we are being asked. What's the balance? What's the balance means the ending figure the ending figure is 14,500 Let's take a look at the third question What total unrealized holding gain with Adam report an x2 income statement relative to its investment in bonds now They're asking us. What should be report in income from these investments? Well, let's start from the beginning Health to maturities Well, those are reported at amortized cost and none of it goes on the income statement Fair value securities well fair value secure trading securities trading securities are reported at fair value and fair value goes to the income statement Yes, I would have to say that fair value Because it goes the change goes through the income statement. It has to be reported on the income statement What a beta? What about available for sale? I just told you it's fair value goes to comprehensive income Which is a balance sheet, which is we don't have to worry about this. Oh, what does that mean? It means all in all all what we have to do is figure out how much was how much was the trading securities effect on the income statement Well for year x2, we have to look at our fair value on x1 Compare the fair value of x1 to the fair value of x2 That's the increase and that increase will or decrease will goes under the income statement. Well, let's see For the first security it went up by 12,000 the first bond the second security if we'll get 64 versus 95 it went up by 31,000 Okay, 31,000 and the third security it went up by 4500 let's add them up and when we add up all the change for bond one bond two and bond three We notice that 47 500 will have to be adjusted to the income statement thus reporting this change on the income statement So what did you have to know here? We had to know that we have three types of securities health or maturities trading securities available for sale one two We have to know where do we report the changes in the value of these securities health or maturities? We don't report it anywhere. It's reported at amortized cost Whatever it's here one or year two. We don't report that fair value Trading securities are reported at fair value, but that change in fair value goes to the income statement available for sale They are also reported at fair value, but they go to comprehensive income first to unrealized gain then to comprehensive income Which is a balance sheet account now also what we did not cover is the journal entries that lead to the 14,500 the change from year to year again I don't want to confuse you more than then I'm so then I should in the simulation But the point is you need to know how to compute those adjusting entries And this is what Farhat lectures will that will do for you. That's what that's why we need to know What you need to do not know what you need to do is go and work MCQs look at additional Simulations exercises on Farhat lectures comm including true false. That's gonna help you understand this concept Once again invest in yourself whether you are a CPA exam candidate or an accounting student. 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