journal entries for trading securities
DESCRIPTION
Chapter 14. Illustrated Solution: Problem 14-36. Journal Entries for Trading Securities. Problem Background. Kopson Company. The carrying value of trading securities as a portfolio is adjusted to market value by using an account titled ”Market Adjustment—Trading Securities.” - PowerPoint PPT PresentationTRANSCRIPT
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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
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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
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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
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Purchase price of the bonds: = $100,000 x 1.0325 = $103,250
Brokerage fees: = 300
Investment in Bonds: = $103,550
Accrued Interest: = $100,000 x 10% x 4/12 = $3,333
Part (a) Part (a)
Kopson Company
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Purchase price of the bonds: = $100,000 x 1.0325 = $103,250
Brokerage fees: = 300
Investment in Bonds: = $103,550
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
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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
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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
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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
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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
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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
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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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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.4. Record any unrealized gain or loss on the 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
Unrealized Gain on Transfer of Securities……. 1,150
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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.4. Record any unrealized gain or loss on the 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
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.
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Adjusting entry for Available-for-Sale Securities
Part (f)Part (f)
Security Cost MarketMarket
AdjustmentAmount in Account
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)
Security Cost MarketMarket
AdjustmentAmount in Account
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
Security Cost MarketMarket
AdjustmentAmount in Account
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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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