27th Edition
WARREN + 5 others
ISBN: 9781337272094




27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Fair value journal entries, trading investments

Last Unguaranteed Financial Inc. purchased the following trading securities during year 1, its first year of operations:

Name Number of Shapes Cost
Arden Enterprises Inc. 5,000 $150,000
French Broad Industries Inc 2,750 66,000
Pisgah Construction Inc 1,600 104,000
Total   $320,000

The market price per share for the trading security portfolio on December 51, Year 1, was as follows:


Market Price per Share,

Dec. 31, Year 1

Arden Enterprises Inc $34
French Broad Industries Inc 26
Pisgah Construction Inc 60

a. Provide the journal entry to adjust the trading security portfolio to fair value on December 31, Year 1.

b. Assume that the market prices of the portfolio were the same on December 31, Year 2, as they were on December 31, Year 1. What would be the journal entry to adjust the portfolio to fair value?


To determine

Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

To journalize: The year-end valuation of trading securities transaction


  • Valuation Allowance for Trading Investments is a contra-asset account. The account is debited because the market price was increased (gain) to $337,500 from the cost of $320,000.
  • Unrealized Gain on Trading Investments is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, and an increase in stockholders’ equity value is credited.

Working Notes:

Compute the unrealized gain (loss) as on December 31.

Step 1: Compute the fair value of the portfolio of the trading investment.

Security Number of Shares × Fair Market Value = Fair Market Value of Investment
Incorporation A 5,000 shares ×


To determine

To explain: The journal entry that would be entered, if the fair value in Year 2 was the same as that in Year 1

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Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)