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

14-2 Problem Background n The carrying value of trading securities as a portfolio is adjusted to market value by using an account titled ”Market Adjustment—Trading Securities.” n 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. n Any unrealized gains or unrealized losses on trading securities is reported on the income statement under “Other Gains” or “Other Losses.” Kopson Company

14-3 Part (a) n 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. n 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. n 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

14-4 Purchase price of the bonds:= $100,000 x =$103,250 Brokerage fees:= 300 Investment in Bonds:= $103,550 Part (a) Kopson Company

14-5 Purchase price of the bonds:= $100,000 x =$103,250 Brokerage fees:= 300 Investment in Bonds:= $103,550 Accrued Interest:= $100,000 x 10% x 4/12= $3,333 Part (a) Kopson Company

14-6 Purchase price of the bonds:= $100,000 x =$103,250 Brokerage fees:= 300 Investment in Bonds:= $103,550 Accrued Interest:= $100,000 x 10% x 4/12= $3,333 Part (a) Kopson Company Nov. 1Investment in Trading Securities —Treasury Bonds…………………………103,550 Interest Revenue………………………3,333 Cash…………………………………106,883

14-7 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 - $160,300). Part (b) Kopson Company SecurityCostMarket Fleming Co. stock$ 25,250$ 23,350 Dobson Co. stock32,45033,950 10% U.S. Treasury bonds103,550103,000 $161,250$160,300

14-8 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) 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

14-9 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. 31Unrealized Loss on Trading Securities………450 Market Adjustment—Trading Securities….450 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

14-10 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, Dec. 31Interest Receivable…………………………….5,000 Interest Revenue……………………………5,000 Part (c) Kopson Company

14-11 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, Dec. 31Interest Receivable…………………………….5,000 Interest Revenue……………………………5,000 Part (c) Kopson Company The cash will be recorded when it is received in However, this entry will not have any effect on revenues. Jan. 1Cash……………………………………………5,000 Interest Receivable…………………………5,000

14-12 The entry given for July 1 is correct. All the interest Kopson Company received in this payment was earned in Part (d) Kopson Company July 1Cash……………………………………………5,000 Interest Revenue.…………………………5,000

14-13 Transfer securities from Trading to Available-for-Sale. Investment in Fleming Company, balances as of Dec. 6: Part (e) Kopson Company Cost Market Value at 12/31/2002 Market Adjustment $25,250$23,350$1,900

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

Remove trading security (recorded at original cost). 2.Remove any market adjustment related to the trading security. Part (e) Kopson Company Dec. 6 Market Adjustment—Trading Securities………….1,900 Investment in Trading Securities— Fleming Co.……………………………………25,250

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) Kopson Company 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

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) Kopson Company Dec. 6Investment 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

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) Kopson Company Dec. 6Investment 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)

14-19 Adjusting entry for Available-for-Sale Securities Part (f) CostMarket Market Adjustment Amount in Account Adjustment Required Fleming Co. stock…………….$ 24,500$ 24,950$450 Dr.0

14-20 Adjusting entry for Available-for-Sale Securities Part (f) SecurityCostMarket Market Adjustment Amount in Account Adjustment Required Flaming Co. stock…………….$ 24,500$ 24,950$450 Dr.0 Dec. 31Market Adjustment—Available-for-Sale Securities…….450 Unrealized Increase/Decrease in Value of Available-for-Sale Securities…………………450

14-21 Adjusting entry for Trading Securities Part (f) SecurityCostMarket Market Adjustment Amount in Account Adjustment Required Dobson Co. stock…………….$ 32,450$ 32,650$200 Dr.$950 Dr.$800 Cr. 10% U.S. Treasury bonds..103,550103,50050 Cr. $136,000$136,150$150 Dr.$950 Dr.$800 Cr.

14-22 Adjusting entry for Trading Securities Part (f) Dec. 31Unrealized Loss on Trading Securities………………800 Market Adjustment—Trading Securities…………800 SecurityCostMarket Market Adjustment Amount in Account Adjustment Required Dobson Co. stock…………….$ 32,450$ 32,650$200 Dr.$950 Dr.$800 Cr. 10% U.S. Treasury bonds..103,550103,50050 Cr. $136,000$136,150$150 Dr.$950 Dr.$800 Cr.

14-23 Entry to record accrued interest on bonds: Part (f) Dec. 31Interest Receivable………………………………….5,000 Interest Revenue…………………………………5,000 Adjusting entry for accrued interest.

14-24 End of Problem