Question

Trading Securities

Instructions

Chart of Accounts

Labels and Amount Descriptions

General Journal

Income Statement

Balance Sheet

Instructions

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 220 shares of Eglan Company common stock that originally cost $5,940. At that time, these securities had a fair value of $5,720. During the fourth quarter, the bank engaged in the following trading securities transactions:

Oct. 26	Purchased 340 shares of Farrell Company common stock for $34 per share.
Nov. 26	Sold 220 shares of Eglan common stock for $25 per share.
Dec. 10	Purchased 390 shares of Gray Company common stock for $43 per share.

On December 31, 2018, the quoted market prices of the shares were as follows: Eglan Company, $56 per share; Farrell Company, $38 per share; and Gray Company, $42 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

CHART OF ACCOUNTS
Southeast Bank
General Ledger
ASSETS 111 Cash 113 Investment in Trading Securities 121 Accounts Receivable 122 Allowance for Doubtful Accounts 125 Notes Receivable 141 Inventory 151 Supplies 152 Prepaid Insurance LIABILITIES 211 Accounts Payable 221 Notes Payable 224 Interest Payable 231 Salaries Payable EQUITY 311 Common Stock 331 Retained Earnings 351 Dividends 391 Income Summary	REVENUE 411 Sales Revenue 431 Interest Income EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 513 Delivery Expense 515 Supplies Expense 521 Advertising Expense 523 Salaries Expense 531 Bad debt Expense 539 Miscellaneous Expenses 540 Interest Expense 895 Loss on Sale of Trading Securities 912 Unrealized Holding Gain/Loss: Trading Securities

Labels and Amount Descriptions

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

General Journal

Prepare journal entries to record the 2018 transactions for the fourth quarter. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9

Income Statement

Show what the bank reports on its fourth quarter 2018 income statement for these trading securities. Additional Instructions

Southeast Bank

Income Statement (partial)

For the Year Ended December 31, 2018

1
2

Balance Sheet

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

Balance Sheet (partial)

December 31, 2018

1	Current assets:
2

FASB requires unrealized gains and losses for trading securities to be reported as a component of income because,

Answer 1

1.) Journal Enries:

Date	Account Title and Explanation	Debit $	Credit $
Oct.26	Investment in Trading securities (340*$34)	11,560
	Cash		11,560
	(To record the purchases of Farrell Co.'s shares)
Nov.26	Cash (220*$25)	5,500
	Loss on sale of securities	220
	Investment in trading securities		5,720
	(To record sale of Eglan Co.'s shares)
Dec.10	Investment in trading securities (390*$43)	16,770
	Cash		16,770
	(To record purchase of Gray Co.'s shares )
Dec.31	Investment in trading securities	970
	Unrealized gain on Investment in trading securities (WORKING)		970
	(To record year end adjustment)

WORKING:

Calculation of Unrealized gain on trading securities

	Cost	Fair value	Difference
Farrell Co.	11,560	12,920	1,360
Gray Co.	16,770	16,380	(390)
Unrealized gain			970

2.) Income Statement:

Income Statement For the fourth quarter 2018
Unrealized gain on Investment in trading securities	$ 970
Less: Loss on sale of securities	(220)
PROFIT	750

3.) Balance Sheet (Extract) :

Balance Sheet At the end of fourth quarter 2018
Current Assets:
Investment in trading securities [(340*$34)+(390*$43)+970]	29,300

4.) Treatment for Unrealized holding gains and losses for trading securities as pe FASB is:

Unrealized holding gains and losses for trading securities are short term investments and shall be reported under Income statement.

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