Question

2. Why is a trading security always a current asset? Explain. S5-2. (Learning Objective 1: Account for short-term investments) Keystone Corp. holds a portfo- lio of trading securities. Suppose that on October 15, Keystone paid $160,000 for an investment in Shurock Co. shares to add to its portfolio. At December 31, the market value of Shurock Co shares is $172,000. For this situation, show everything that Keystone would report on its December 31 balance sheet and on its income statement for the year ended December 31.

help please!

Answer 1

Answer:

Let us first get the Journal Entries:

On purchase of trading securities October 15:

Credit Date Accounts Title October. 15 Investment in Trading Securities Cash Debit $160,000 $160,000

Now since these are trading securities, at the financial year end, these has to be reported at Fair Value:

At December 31:

Fair value = $172,000

Adjusted basis = $160,000

Unrealized Gain = 172000 - 160000 = $12,000

Journal Entry:

Date Credit Accounts Title December. 31 Fair Value Adjustment - Trading Securities Unrealized gain on Investment in Trading Securities Debit $12,000 $12,000

Now:

The unrealized gain of $12,000 will be reported as income/revenue in Income Statement and Trading securities will be reported at fair value of $172,000 under Current Asset in Balance sheet as follows:

Keystone Corp. Income Statement (Extract) For the Year Ended December. 31, XXXX Revenue: Unrealized Gain on investment in Trading Securities $12,000

Keystone Corp. Balance Sheet (Extract) As on Year Ended December. 31, XXXX Assets Liabilities Current Assets Investment in Trading securities $172,000