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Last Unguaranteed Financial Inc. purchased the following trading securities during Year 1, its first year of operations: The market price per share for the trading security portfolio on December 31, Year 1, was as follows: 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?

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 15, Problem 17E
Textbook Problem
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Last Unguaranteed Financial Inc. purchased the following trading securities during Year 1, its first year of operations:

Chapter 15, Problem 17E, Last Unguaranteed Financial Inc. purchased the following trading securities during Year 1, its first , example  1

The market price per share for the trading security portfolio on December 31, Year 1, was as follows:

Chapter 15, Problem 17E, Last Unguaranteed Financial Inc. purchased the following trading securities during Year 1, its first , example  2

  1. a. Provide the journal entry to adjust the trading security portfolio to fair value on December 31, Year 1.
  2. 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?

(a)

To determine

Journalize the year-end valuation of trading securities transaction.

Explanation of Solution

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.

Prepare adjusting entry for valuation of trading securities transaction.

Table (1)

  • 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...

(b)

To determine

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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Chapter 15 Solutions

Financial Accounting
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