Question

1. Exercise 12-17 (Algorithmic)
   Trading Securities

   Fehr Finance began operations in 2018 and invests in securities held for trading. During 2018, it entered into the following trading security transactions:

   Purchased 21,500 shares of ABC common shares at $36.50 per share
   Purchased 13,500 shares of XYZ common shares at $17.00 per share

   At December 31, 2018, ABC's common shares were trading at $39.50 per share and XYZ's common shares were trading at $14.00 per share.

   Required:

   1. Prepare the necessary adjusting entry to value the trading securities at fair market value. For those boxes in which no entry is required, leave the box blank.

   2018, Dec. 31
   	(Record trading securities at fair value)

   2. CONCEPTUAL CONNECTION: What is the statement of earnings effect of this adjusting entry?

   For trading securities, the  is reported on the income statement. It would  earnings before income taxes by $.

Answer 1

Security	Cost		Fair value
ABC	$784,750	21500*36.50	$849,250	21500*39.50
XYZ	$229,500	13500*17	$189,000	13500*14
Total	$1,014,250		$1,038,250
Increase in value of security	$24,000	1038250-1014250
Date	General Journal	Debit	Credit
31-Dec-18	Fair value adjustment - Trading	$24,000
	Unrealized gain or loss - Income		$24,000
	(To record trading securities at fair value)
Unrealized gain or loss in case of trading securities are reported in the income statement
The fair value of securities is higher than cost of securities and thus there is unrealized gain at year end
For trading securities, the unrealized gain is reported on the income statement
It would increase earnings before income taxes by $24,000