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Journal Entries for Trading Securities

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.”

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Journal Entries for Trading Securities

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  1. Chapter 14 Illustrated Solution: Problem 14-36 Journal Entries for Trading Securities

  2. 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.” • 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.”

  3. Part (a) Kopson Company • 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.

  4. Part (a) Kopson Company Purchase price of the bonds: = $100,000 x 1.0325 = $103,250 Brokerage fees: = 300 Investment in Bonds: = $103,550

  5. Part (a) Kopson Company 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

  6. Part (a) Kopson Company 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 Nov. 1 Investment in Trading Securities —Treasury Bonds ………………………… 103,550 Interest Revenue ……………………… 3,333 Cash ………………………………… 106,883

  7. Part (b) Kopson Company 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).

  8. Part (b) Kopson Company Cost ……………………………………………………………… $161,250 Market …………………………………………………………… 160,300 Balance required in market adjustment account—credit ….. $ 950 Balance in market adjustment account—credit before adjusting entry ………………………………………………. 500 Credit to market adjustment account ………………………… $ 450 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.

  9. Part (b) Kopson Company Cost ……………………………………………………………… $161,250 Market …………………………………………………………… 160,300 Balance required in market adjustment account—credit ….. $ 950 Balance in market adjustment account—credit before adjusting entry ………………………………………………. 500 Credit to market adjustment account ………………………… $ 450 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

  10. Part (c) Kopson Company 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

  11. Part (c) Kopson Company 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 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

  12. Part (d) Kopson Company The entry given for July 1 is correct. All the interest Kopson Company received in this payment was earned in 2003. July 1 Cash …………………………………………… 5,000 Interest Revenue . ………………………… 5,000

  13. Part (e) Kopson Company Transfer securities from Trading to Available-for-Sale. Investment in Fleming Company, balances as of Dec. 6:

  14. Part (e) Kopson Company Remove trading security (recorded at original cost). • Dec. 6 Investment in Trading Securities— • Fleming Co. …………………………………… 25,250

  15. Part (e) Kopson Company Remove trading security (recorded at original cost). Remove any market adjustment related to the trading security. • Dec. 6 Market Adjustment—Trading Securities …………. 1,900 Investment in Trading Securities— • Fleming Co. …………………………………… 25,250

  16. Part (e) Kopson Company Remove trading security (recorded at original cost). Record any market adjustment related to the trading security. Record the AFS security at market value on the date of transfer. Dec. 6 Investment in Available-for-Sale Securities—Fleming Co. ………………………… 24,500 Market Adjustment—Trading Securities …………. 1,900 Investment in Trading Securities— Fleming Co. …………………………………… 25,250

  17. Part (e) Kopson Company Remove trading security (recorded at original cost). Record any market adjustment related to the trading security. Record the AFS security at market value on the date of transfer. Record any unrealized gain or loss on the transfer. Dec. 6 Investment in Available-for-Sale Securities—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

  18. Part (e) Kopson Company Remove trading security (recorded at original cost). Record any market adjustment related to the trading security. Record the AFS security at market value on the date of transfer. Record any unrealized gain or loss on the transfer. Dec. 6 Investment in Available-for-Sale Securities—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)

  19. Part (f) Adjusting entry for Available-for-Sale Securities

  20. Part (f) Adjusting entry for Available-for-Sale Securities Dec. 31 Market Adjustment—Available-for-Sale Securities ……. 450 Unrealized Increase/Decrease in Value of Available-for-Sale Securities ………………… 450

  21. Part (f) Adjusting entry for Trading Securities

  22. Part (f) Adjusting entry for Trading Securities Dec. 31 Unrealized Loss on Trading Securities ……………… 800 Market Adjustment—Trading Securities ………… 800

  23. Part (f) Entry to record accrued interest on bonds: Dec. 31 Interest Receivable …………………………………. 5,000 Interest Revenue ………………………………… 5,000 Adjusting entry for accrued interest.

  24. End of Problem

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