Southeast Bank invests in trading securities and prepares quarterly financial statements. At the beginning of the fourth quarter of 2018, the bank held as trading securities 160 shares of Eglan Company common stock that originally cost $4,560. At that time, these securities had a fair value of $4,320. During the fourth quarter, the bank engaged in the following trading securities transactions:
| Oct. 26 | Purchased 360 shares of Farrell Company common stock for $38 per share. |
| Nov. 26 | Sold 160 shares of Eglan common stock for $26 per share. |
| Dec. 10 | Purchased 370 shares of Gray Company common stock for $40 per share. |
On December 31, 2018, the quoted market prices of the shares were as follows: Eglan Company, $52 per share; Farrell Company, $41 per share; and Gray Company, $39 per share.
Required:
| 1. | Prepare journal entries to record the 2018 transactions for the fourth quarter. |
| 2. | Show what the bank reports on its fourth quarter 2018 income statement for these trading securities. |
| 3. | Show how the bank reports these trading securities on its balance sheet at the end of the fourth quarter of 2018. |
| 4. | Next Level What justification does the FASB give for its treatment of unrealized holding gains and losses for trading securities? |
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| Amount Descriptions | |
| Investment in Available-for-Sale Securities | |
| Investment in Trading Securities (at fair value) | |
| Investment in Trading Securities (at cost) | |
| Unrealized Loss on Increase in Value of Trading Securities |
Prepare journal entries to record the 2018 transactions for the fourth quarter. Additional Instructions
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GENERAL JOURNAL
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Show what the bank reports on its fourth quarter 2018 income statement for these trading securities. Additional Instructions
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Southeast Bank |
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Income Statement (partial) |
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For the Year Ended December 31, 2018 |
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Show how the bank reports these trading securities on its balance sheet at the end of the fourth quarter of 2018. Additional Instructions
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Southeast Bank |
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Balance Sheet (partial) |
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December 31, 2018 |
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Current assets: |
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FASB requires unrealized gains and losses for trading securities to be reported as a component of income because,
Southeast Bank invests in trading securities and prepares quarterly financial statements. At the beginning of the fourth quarter of 2018, the bank held as trading securities 160 shares of Eglan Company common stock that originally cost $4,560. At that time, these securities had a fair value of $4,320. During the fourth quarter, the bank engaged in the following trading securities transactions:
| Oct. 26 | Purchased 360 shares of Farrell Company common stock for $38 per share. |
| Nov. 26 | Sold 160 shares of Eglan common stock for $26 per share. |
| Dec. 10 | Purchased 370 shares of Gray Company common stock for $40 per share. |
On December 31, 2018, the quoted market prices of the shares were as follows: Eglan Company, $52 per share; Farrell Company, $41 per share; and Gray Company, $39 per share.
Required:
| 1. | Prepare journal entries to record the 2018 transactions for the fourth quarter. |
| 2. | Show what the bank reports on its fourth quarter 2018 income statement for these trading securities. |
| 3. | Show how the bank reports these trading securities on its balance sheet at the end of the fourth quarter of 2018. |
| 4. | Next Level What justification does the FASB give for its treatment of unrealized holding gains and losses for trading securities? |
| CHART OF ACCOUNTS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Southeast Bank | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General Ledger | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Amount Descriptions | |
| Investment in Available-for-Sale Securities | |
| Investment in Trading Securities (at fair value) | |
| Investment in Trading Securities (at cost) | |
| Unrealized Loss on Increase in Value of Trading Securities |
Prepare journal entries to record the 2018 transactions for the fourth quarter. Additional Instructions
PAGE 1
GENERAL JOURNAL
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Show what the bank reports on its fourth quarter 2018 income statement for these trading securities. Additional Instructions
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Southeast Bank |
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Income Statement (partial) |
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For the Year Ended December 31, 2018 |
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1 |
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2 |
Show how the bank reports these trading securities on its balance sheet at the end of the fourth quarter of 2018. Additional Instructions
|
Southeast Bank |
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Balance Sheet (partial) |
|
December 31, 2018 |
|
1 |
Current assets: |
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2 |
FASB requires unrealized gains and losses for trading securities to be reported as a component of income because,
All of the choices are correct
The securities are actively managed making the inclusion of gains and losses relevant.
The liquidity needs of the company mean the securities will be sold for cash in the near term.
The nearness to cash of trading securities.
1.
| DATE | ACCOUNT TITLE | POST. REF. | DEBIT | CREDIT | |
| 1 | Oct. 26 | Investment in trading securities (Farrell) | 13680 | ||
| 2 | Cash (360 x $38) | 13680 | |||
| 3 | Nov. 26 | Cash (160 x $26) | 4160 | ||
| 4 | Loss on sale of trading securities | 400 | |||
| 5 | Investment in trading securities (Eglan) | 4560 | |||
| 6 | Dec. 10 | Investment in trading securities (Gray) | 14800 | ||
| 7 | Cash (370 x $40) | 14800 | |||
| 8 | Dec. 31 | Investment in trading securities | 950 | ||
| 9 | Unrealized holding gain/loss: trading securities | 950 |
Working:
| Security | Cost | Fair Value | Unrealized gain (loss) |
| Farrell Co. | $ 13,680 | $ 14,760 | |
| Gray Co. | $ 14,800 | $ 14,430 | |
| Total | $ 28,480 | $ 29,190 | $ 710 |
| Fair value, beginning balance (credit) ($4560 - $4320) | $ 240 | ||
| Fair value, ending balance required (debit) | $ 710 | ||
| Adjustment (debit) ($710 + $240) | $ 950 | ||
2.
| Southeast Bank | ||
| Income Statement (partial) | ||
| For the Year Ended December 31, 2018 | ||
| 1 | Loss on sale of trading securities | 400 |
| 2 | Unrealized gain on increase in value of trading securities | 950 |
3.
| Southeast Bank | ||
| Balance Sheet (partial) | ||
| December 31, 2018 | ||
| 1 | Current assets: | |
| 2 | Investment in trading securities (at fair value) | 29190 |
4. All of the choices are correct.
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