Question

In 2011, a firm purchased a portfolio of marketable securities for $2,000, which it holds as current assets. At the end of 2011, the portfolio had a market value of $1,600. During 2012, the firm sold some of the securities for $240 which had originally cost $200, but which had a market value of $180 at the end of 2011. At the end of 2012, the remaining securities had a market value of $2,300.

a. Assume the firm treats its holdings as available for sale.

1. Record the entry made at the end of 2011.

2. Record the entries made during 2012 and at the end of 2012.

b. Assume the firm treats its holdings as trading securities.

1. Record the entry made at the end of 2011.

2. Record the entries made during 2012 and at the end of 2012.

Answer 1

A. The securities purchased are held as available for sale i.e., they would be kept up till maturity. The securities would be valued at fair vale and any unrealized gain/loss would form part of Other Comprehensive Income till it is actually realized.

1. Entry at the end of 2011

Loss on available for sale securities.................Dr. $400

To Investments held as available for sale $400

2. Entry for transaction during 2012

Bank Account.................Dr. $240

To Investments held as available for sale $180

To Loss on available for sale securities $20

To Gain on available for sale securities $40

Entry at the end of 2012

Investments held as available for sale.................Dr.    $500

To Gain on available for sale securities $500

B. The securities purchased are held as trading securities i.e., they are bought of the purpose of making short-term gains. The securities would be valued at fair vale and any unrealized gain/loss would form part of Income Statement.

1. Entry at the end of 2011

Loss on trading securities.................Dr. $400

To Investments held for trading $400

2. Entry for transaction during 2012

Bank Account.................Dr. $240

To Investments held for trading $180

To Gain on trading securities $60

Entry at the end of 2012

Investments held for trading.................Dr. $500

To Gain on trading securities $500