Question

Available For Sale and Trading Securities

The investment operations group for FM Global buys and sells equity securities regularly. On December 5, 2012, the company purchased class 1 shares of Disney common stock for $5,500,000 cash and later sold the shares for $5,600,000 on January 10, 2013.   On December 31, 2012, the company received a cash dividend from Disney of $10,000. Also on December 31, 2012, it became known that the fair value of those Disney shares appreciated to a value of $5,550,000.

1. Provide the journal entries required if these investments are categorized as trading? Don’t forget to include any necessary December 31 adjustments.

2. What would be the difference if these investments are categorized as available for sale?

Answer 1

Answer 1

Date	Accounts Titles & Explanation	Debit ($)	Ceredit ($)
December 5, 2012	Invetment in Trading Securities	5,500,000
	Cash		5,500,000
	[To record purchase of trading securities]
December 31, 2012	Cash	10,000.
	Dividend Income		10,000
	[ To record receipt of dividend income]
December 31, 2012	Invetment in Trading Securities	50,000
	Unrealized Gain - Trading Securities		50,000
	[To record entry for fair value adjustments]
January 10, 2013	Cash	5,600,000
	Invetment in Trading Securities [$5,500,000 + $50,000]		5,550,000
	Gain on sale of trading securities		50,000
	[To sale of  trading securities]

Answer 2

Difference i accounting treatment if these investments are categorized as available for sale :

• The entry for purchase of investment , receipt of dividends & fair value adjustment will remain same under both categories
• The Unrealized Gain out of fair value adjustment under trading securities will be reoprted in Income statement .
• The Unrealized Gain out of fair value adjustment under available for sale category will be reoprted in Other Coprehensive Income (Balance Sheet) .
• Under available for sale category, in sales of investment entry on January 10, 2013 , the unrealized gain will be eliminated.
• Thus gain on sales of securities under trading category will be $50,000 & under available for sale category will be $100,000

Journal Entries - Available for sale Investment

Date	Accounts Titles & Explanation	Debit ($)	Ceredit ($)
December 5, 2012	Invetment in Available for sale Securities	5,500,000
	Cash		5,500,000
	[To record purchase of available for sale securities]
December 31, 2012	Cash	10,000.
	Dividend Income		10,000
	[ To record receipt of dividend income]
December 31, 2012	Invetment in Available for sale Securities	50,000
	Unrealized Gain - Available for sale Securities		50,000
	[To record entry for fair value adjustments]
January 10, 2013	Cash	5,600,000
	Unrealized Gain - Available for sale Securities	50,000
	Invetment in Trading Securities [$5,500,000 + $50,000]		5,550,000
	Gain on sale of trading securities		100,000
	[To record sale of available for sale securities]