University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

456

Pages:

2
Author:

stud_ice13

Solution 1. July 1: Record the Purchase of Trading Securities o Journal Entry: markdown Debt Investments—Trading 130 Cash 130 Explanation: Records the initial cost of purchasing trading securities at $130. 2. December 30: Record Receipt of Cash Interest o Journal Entry: o markdown Cash 1 Interest Revenue 1 Explanation: Records the $1 interest received from the trading securities on December 30. 3. December 31: Year-End Fair Value Adjustment o Fair value of trading securities at year-end is $140, and the cost is $130, resulting in a $10 unrealized gain. o Journal Entry: o markdown Fair Value Adjustment—Trading 10 Unrealized Gain—Income 10 Explanation:  Fair Value Adjustment—Trading is a balance sheet account, adjusting the carrying amount of the trading securities portfolio to its fair value.  Unrealized Gain—Income is a temporary income statement account that records the unrealized gain on the portfolio for the period. It is reported in the "Other Revenues and Gains" section of the income statement. 4. Explanation of Financial Statement Reporting (Entry c) o Fair Value Adjustment—Trading: This account is shown as an adjunct (increase) to the Debt Investments—Trading account in the current assets section of the balance sheet, adjusting the portfolio’s carrying value to fair value. o Unrealized Gain—Income: This account is presented in the "Other Revenues and Gains" section of the income statement, reflecting the o unrealized gain on trading securities for the period. At period-end, this account is closed to Income Summary. 5. January 3: Record the Sale of a Portion of Trading Securities o If Berkshire Co. sells part of its trading securities with a cost of $33 for $36, there is a realized gain of $3. o Journal Entry: csharp Cash 36 Debt Investments—Trading Gain on Sale of Investments o 33 3 Explanation: The $3 gain is recognized as realized because it resulted from an actual sale. It is reported in the "Other Revenues and Gains" section of the income statement. Summary of Accounts Used in Reporting • • • • Debt Investments—Trading: A current asset on the balance sheet representing the cost of trading securities. Fair Value Adjustment—Trading: Adjusts the portfolio value to its fair market value on the balance sheet. Unrealized Gain—Income: Appears on the income statement as "Other Revenues and Gains," showing the unrealized gain for the reporting period. Gain on Sale of Investments: Reported under "Other Revenues and Gains" on the income statement, reflecting the realized gain from the sale. This approach accounts for trading securities based on fair value, with adjustments recorded for unrealized gains or losses and realized gains upon sale, following GAAP standards for trading securities.