Answers
Case A. Investment classified as HTM
12/31/2017 - Investment in Mud Co. Bonds - Dr 5,000
To Bank A/c 5,000
Same Journal Entry will be done on 12/31/2018 as well.
Since the amount is invested as Held for Maturity, hence the short term decline in the value of investment is ignored as the returns are predetermined. And the Held for Maturity securities are recorded at amortized cost. However we will make a disclosure in our Notes to accounts regarding the decline in the value of the same on 12/31/2017 as well as the same disclosure will be made when there is a increase in the value of the same on 12/31/2018
Case B.
Investment classified as AFS
Available for sale securities are debt and equity securities that are not expected to be Held for Maturity. Available for sale securities are reported on the balance sheet at the fair value. But any unrealized gains and losses are not recognized in the income statement but are reported in other comprehensive income as a part of shareholders’ equity.
12/31/2017
Investment in Mud Co. Bonds - Dr 4,200
Other Comprehensive Income - Dr 800
To Bank A/c 5,000
Subsequent increase in the fair value of the investments will be again recognized in the OCI
12/31/2018
Investment in Mud Co.Bonds - Dr 900
To Other Comprehensive Income 900.
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