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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Trading Securities At the beginning of 2019, Able Company had the following portfolio of investments in trading securities (all of which were acquired at par value):

Chapter 13, Problem 8E, Trading Securities At the beginning of 2019, Able Company had the following portfolio of investments , example  1

During 2019, the following transactions occurred:

May 3 Purchased C debt securities at their par value for $50,000.

July 1 Sold all of the A securities for $27,000 plus interest of $1,000.

Dec. 31 Received interest of $7,600 on the B and C securities Additionally the Following information was available:

Chapter 13, Problem 8E, Trading Securities At the beginning of 2019, Able Company had the following portfolio of investments , example  2

Required:

  1. 1. Prepare journal entries to record the preceding information.
  2. 2. Next Level What justification does the FASB give for its treatment of unrealized holding gains and losses for trading securities?

1.

To determine

Record the journal entries in the books of Company A.

Explanation

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

Trading securities: these are the securities which are purchased to earn the profits due to changes in their market prices.

Record the journal entries in the books of Company A.

DateAccount Title and ExplanationDebit ($)

Credit

($)

May3, 2019Investment in trading securities50,000 
         Cash 50,000
 (To record the purchase of investment)  

Table (1)

  • Investment in trading securities is an asset account and it is increased. Thus, debit investment in trading securities with $50,000.
  • Cash is an asset account and it is decreased. Thus, credit cash with $50,000.
DateAccount Title and ExplanationDebit ($)

Credit

($)

July 1, 2019Cash28,000 
     Investment in trading securities 25,000
     Gain on sale of trading securities     ($27,000$25,000) 2,000
        Interest income 1,000
 (To record the interest income)  

Table (2)

  • Cash is an asset account and it is increased. Thus, debit cash with $28,000.
  • Investment in trading securities is an asset account and it is decreased. Thus, credit investment in trading securities with $25,000

2.

To determine

Explain the justification that would be given by FASB for the treatment of unrealized gain and losses for trading securities.

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