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Trading Securities
Pear Investments began operations in 2020 and invests in securities classified as trading securities. During 2020, it entered into the following trading security transactions:
Purchased 20,000 shares of ABC common stock at $38 per share Purchased 32,000 shares of XYZ common stock at $17 per share
At December 31, 2020, ABC common stock was trading at $39.50 per share and XYZ common stock was trading at $16.50 per share.
Required:
1. Prepare the necessary adjusting entry to value the trading securities at fair market value.
2. CONCEPTUAL CONNECTION What is the income statement effect of this adjusting entry?
(a)
Introduction:
Investment in debt security (available for sale securities and trading securities) as well as equity securities is recorded using Fair Value Method.
To record:
Journal entry to record securities at fair value.
| Securities | Acquisition Cost (1) | Fair Value at Dec 31, 2020 (2) | Difference [(2) − (1)] |
| ABC | $760,000 | $790,000 | $30,000 |
| XYZ | $544,000 | $528,000 | ($16,000) |
| Total | $1,304,000 | $1,318,000 | 14,000 |
| No. of shares | Value per share | Total | |
| For ABC:
Acquisition Cost |
20,000 20,000 |
$38 $39... |
(b)
Introduction:
Investment in debt security (available for sale securities and trading securities) as well as equity securities is recorded using Fair Value Method.
To explain:
The effect of adjusting entry on Income Statement.
Chapter A2 Solutions
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