journal entries for trading securities

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Journal Entries forTrading Securities

Chapter 14Illustrated Solution: Problem 14-36Illustrated Solution: Problem 14-36

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Problem BackgroundProblem Background

The carrying value of trading securities as a portfolio is adjusted to market value by using an account titled ”Market Adjustment—Trading Securities.”

This market adjustment account will have a debit balance if the total market value of trading securities exceeds their total cost as of a balance sheet date. Likewise, this market adjustment account will have a credit balance if the total cost of trading securities exceeds their combined value as of a balance sheet date.

Any unrealized gains or unrealized losses on trading securities is reported on the income statement under “Other Gains” or “Other Losses.”

Kopson Company

14-3

Part (a)Part (a)

Any accrued interest on bonds purchased between interest dates has already been added to the transaction price. When the purchaser is using the revenue approach to record the transaction, the Interest Revenue account is debited for the amount of the accrued interest.

At the date when the interest payment is received on the bonds (payment will represent 6 months’ worth of interest), this payment is credited to the Interest Revenue account.

The net effect of the two entries described above allows the purchaser of the bonds to reflect the proper amount in the Interest Revenue account.

Kopson Company

14-4

Purchase price of the bonds: = $100,000 x 1.0325 = $103,250

Brokerage fees: = 300

Investment in Bonds: = $103,550

Part (a)Part (a)

Kopson Company

14-5




Accrued Interest: = $100,000 x 10% x 4/12 = $3,333

Part (a) Part (a)

Kopson Company

14-6




Accrued Interest: = $100,000 x 10% x 4/12 = $3,333

Part (a)Part (a)

Kopson Company

Nov. 1 Investment in Trading Securities—Treasury Bonds…………………………103,550Interest Revenue……………………… 3,333

Cash………………………………… 106,883

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When the acquisition cost of the bonds is correctly restated (with entry made on November 1), the correct balance required in the market adjustment account as of December 31 is a credit of $950 ($161,250 - $160,300).

Part (b)Part (b)

Kopson Company

Security Cost Market

Fleming Co. stock $ 25,250 $ 23,350

Dobson Co. stock 32,450 33,950

10% U.S. Treasury bonds 103,550 103,000

$161,250 $160,300

14-8

The Market Adjustment—Trading Securities account has a credit balance of $500 on December 31 before the adjustment. Therefore, an adjusting entry must be made to credit the market adjustment account for an additional $450.

Part (b)Part (b)

Kopson Company

Cost……………………………………………………………… $161,250Market…………………………………………………………… 160,300Balance required in market adjustment account—credit ….. $ 950Balance in market adjustment account—credit before

adjusting entry………………………………………………. 500Credit to market adjustment account………………………… $ 450

14-9

The Market Adjustment—Trading Securities account has a credit balance of $500 on December 31 before the adjustment. Therefore, an adjusting entry must be made to credit the market adjustment account for an additional $450.

Dec. 31 Unrealized Loss on Trading Securities……… 450

Market Adjustment—Trading Securities…. 450

Part (b)Part (b)

Kopson Company

Cost……………………………………………………………… $161,250Market…………………………………………………………… 160,300Balance required in market adjustment account—credit ….. $ 950Balance in market adjustment account—credit before

adjusting entry………………………………………………. 500Credit to market adjustment account………………………… $ 450

14-10

Even though the bond interest payment will not be received until January 1, 2003, Kopson Co. must make an adjusting entry to record the interest revenue earned as of December 31, 2002.

Dec. 31 Interest Receivable……………………………. 5,000

Interest Revenue…………………………… 5,000

Part (c)Part (c)

Kopson Company

14-11

Even though the bond interest payment will not be received until January 1, 2003, Kopson Co. must make an adjusting entry to record the interest revenue earned as of December 31, 2002.

Dec. 31 Interest Receivable……………………………. 5,000

Interest Revenue…………………………… 5,000

Part (c)Part (c)

Kopson Company

The cash will be recorded when it is received in 2003. However, this entry will not have any effect on revenues.

Jan. 1 Cash …………………………………………… 5,000

Interest Receivable………………………… 5,000

14-12

The entry given for July 1 is correct. All the interest Kopson Company received in this payment was earned in 2003.

Part (d)Part (d)

Kopson Company

July 1 Cash …………………………………………… 5,000

Interest Revenue .………………………… 5,000

14-13

Transfer securities from Trading to Available-for-Sale.

Investment in Fleming Company, balances as of Dec. 6:

Part (e)Part (e)

Kopson Company

CostMarket Value

at 12/31/2002Market Adjustment

$25,250 $23,350 $1,900

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1. Remove trading security (recorded at original cost).

Part (e)Part (e)

Kopson Company

Dec. 6

Investment in Trading Securities—

Fleming Co.…………………………………… 25,250

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1. Remove trading security (recorded at original cost).2. Remove any market adjustment related to the trading

security.

Part (e)Part (e)

Kopson Company

Dec. 6

Market Adjustment—Trading Securities…………. 1,900 Investment in Trading Securities—

Fleming Co.…………………………………… 25,250

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1. Remove trading security (recorded at original cost).2. Record any market adjustment related to the trading

security.3. Record the AFS security at market value on the date of

transfer.

Part (e)Part (e)

Kopson Company

Dec. 6 Investment in Available-for-SaleSecurities—Fleming Co.…………………………24,500

Market Adjustment—Trading Securities…………. 1,900

Investment in Trading Securities—Fleming Co.…………………………………… 25,250

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transfer.4. Record any unrealized gain or loss on the transfer.

Part (e)Part (e)

Kopson Company




Unrealized Gain on Transfer of Securities……. 1,150

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transfer.4. Record any unrealized gain or loss on the transfer.

Part (e)Part (e)

Kopson Company




Unrealized Gain on Transfer of Securities……. *1,150

*Change in value from 12/31/02 to 12/06/03 ($24,500 – $23,350 = $1,150)

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Adjusting entry for Available-for-Sale Securities

Part (f)Part (f)

Cost MarketMarket

AdjustmentAmount in Account

Adjustment Required

Fleming Co. stock……………. $ 24,500 $ 24,950 $450 Dr. 0 $450 Dr.

14-20

Adjusting entry for Available-for-Sale Securities

Part (f)Part (f)

Security Cost MarketMarket


Adjustment Required

Flaming Co. stock……………. $ 24,500 $ 24,950 $450 Dr. 0 $450 Dr.

Dec. 31 Market Adjustment—Available-for-Sale Securities……. 450

Unrealized Increase/Decrease in Value ofAvailable-for-Sale Securities………………… 450

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Adjusting entry for Trading Securities

Part (f)Part (f)



Adjustment Required

Dobson Co. stock……………. $ 32,450 $ 32,650 $200 Dr. $950 Dr. $800 Cr.

10% U.S. Treasury bonds.. 103,550 103,500 50 Cr.

$136,000 $136,150 $150 Dr. $950 Dr. $800 Cr.

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Adjusting entry for Trading Securities

Part (f)Part (f)

Dec. 31 Unrealized Loss on Trading Securities……………… 800Market Adjustment—Trading Securities………… 800



Adjustment Required

Dobson Co. stock……………. $ 32,450 $ 32,650 $200 Dr. $950 Dr. $800 Cr.

10% U.S. Treasury bonds.. 103,550 103,500 50 Cr.

$136,000 $136,150 $150 Dr. $950 Dr. $800 Cr.

14-23

Entry to record accrued interest on bonds:

Part (f)Part (f)

Dec. 31 Interest Receivable…………………………………. 5,000

Interest Revenue………………………………… 5,000Adjusting entry for accrued interest.

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End of ProblemEnd of Problem

journal entries for trading securities

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