Lastly, the securities available-for-sale account consists of both debt and equity securities that are purchased to sell before they reach maturity and are reported at fair market value. For State Street to record dividends or interest received from securities available-for-sale, it needs to debit the cash account and credit dividend income or interest income. To record an increase in market value of securities available-for-sale increased during the reporting period, State Street would debit the securities available-for-sale account and credit the unrealized holding gain on securities available-for- sale account. State Street should report the unrealized gain within other
101 comprehensive income, which later becomes part of the accumulated other comprehensive income section on the balance sheet.
At the end of 2012, State Street’s balance sheet shows the “Investment securities available for sale” account holds a balance of $109,682 million, which is the fair value of the securities at this date. Note 4 of the financial statements displays the net unrealized gains or losses related to the available-for-sale securities. For 2012, these securities have a net gain of
$1,119 million. In addition, these securities have realized earnings for 2012.
The net realized gain on the available-for-sale securities is $55 million. The realized gain of $55 million would go on the income statement in the other revenues and gains section but would decrease the investing section of the cash flow statement since the realized gain was already included in net income. If State Street failed to deduct this gain in the investing section, it results in accounting for the gain twice. Even so, since State Street sold the securities for a gain, this means the cash is higher than the cost. So, overall, cash flow from this transaction increases.
Throughout the year, State Street bought and sold available-for-sale securities. We know this is the case since the company has realized gains and losses from the sale of the securities in 2012. To journalize the purchase of available-for-sale securities, State Street debited the available-for-sale security account and credited the cash account to show payment. Below,
Figure 10.1 shows the journal entry State Street made to record the purchase of available-for-sale securities for 2012.
Figure 10.1: Journal for Appendix J part Gi
Investment securities available-for-sale 60,812
Cash 60,812
During the year, State Street sold some of its older available-for-sale securities as well. According to Note 13 of the financial statements, the available-for-sale securities sold during 2012 had “unrealized pre-tax gains of $67 million as of December 31, 2011.” When a company sells its available- for-sale securities, it must remove any unrealized gains as well as realize any gains or losses on the sale. At the top of the next page, Figure 10.2 shows the journal entry State Street made to record the sale of available-for-sale securities for 2012.
Figure 10.2: Journal for Appendix J part Gii
Unrealized gain from investment securities available-for-sale 67
Cash 5,399
Investment securities available-for-sale 5,411 Realized gain from sales of available-for-sale securities 55
As seen above, State Street removed the unrealized gain on the available-for-sale securities. The company received $5,399 million in cash from the sale, realized a gain of $55 million (as shown in Note 4 of the
103 financial statements), and removed the original cost of the available-for-sale securities. Therefore, the original cost for these securities was found by adding the amounts for the cash received and unrealized gain then subtracting the amount of realized gain. So, the original cost of the securities equals $5,411 million.
Similar to using the other amounts to find the original cost of the securities, we can find the actual debit and credit amounts to the unrealized gains and losses on available-for-sale securities as well by using amounts found in the financial statement. Doing so allows us to discern the net unrealized gain or loss during 2012 for the available-for-sale securities on hand at December 31, 2012—not just unrealized gains or losses on the securities sold as shown in the last paragraph. According to Note 4 to the financial statements, the beginning balance in the net unrealized gain (loss) on investment securities available for sale account was $181 million, and the ending balance equaled $1,119. We also know State Street debited this account for $67 million when it sold some of the available-for-sale securities.
So, to find the unrealized gain or loss for the securities on hand on December 31, 2012, we must simply find the missing number on the T-account. This T- account, along with the other amounts mentioned, is found on the next page in Figure 10.3.
Figure 10.3: Journal for Appendix J part Giv
181
67
1,367
1,119
$ Net unrealized gain (loss) on Investment
securities available-for-sale
As seen above, the amount needed to balance the account is a credit of
$1,367 million. This amount is the unrealized holding gain on the available- for-sale securities on hand at year-end 2012. To journalize this transaction, State Street would debit the investment securities available for sale account and credit the unrealized gain from investment securities available for sale account for $1,367 million. This journal entry is found in Figure 10.4 below.
Figure 10.4: Journal for Appendix J part Giv
Investment securities available-for-sale 1,367
Unrealized gain from investment securities available-for-sale 1,367
Conclusion
As explained above, investment securities can be tricky. If any of these securities were classified incorrectly, then a company’s balance sheet, income statement, and even statement of cash flows would be incorrect and would mislead both the company’s stockholders as well as its investors.
Understanding what the company intends to do with the securities
105 purchased is the most effective and precise way to classify each marketable security. Thus, accountants must be extremely careful when handling transactions involving these kinds of investment securities. Any additional questions concerning this chapter may be answered in Appendix J.
An analysis of both risk factors and revenue recognition standards companies face and the way these affect financial statements.