U.C. Berkeley Chapter 6, SW Spring 2001
Haas School of Business April 12, 2001 BA230B
We know how to record assets on the balance sheet. What happens if these assets are in the form of stocks and bonds (income yielding securities) that can be readily converted to cash? What happens over time?
Marketable Securities
- Fit into the category of minority passive investments
- Three types of marketable securities:
- Debt securities held to maturity (not shown at fair value) p.591
- Trading securities (shown at market value with changes in value appearing in the income statement each year) p.592
- Securities available for sale (shown at market value with realized changes in value appearing in the income statement and unrealized changes appearing in a separate owners’ equity account) p.593
- Realized = Sold; Unrealized = Still have it
- (An aside – for tax purposes the IRS waits until the gains or losses have been realized).
How do you approach these questions? (Apart from with excitement and vigor).
1. Identify / note the type of marketable security.
2. Conceptualize timeline of events.
3. Look for changes in value.
4. Determine whether gains / losses have been realized or not.
Solutions to S&W
11.16 (Simmons Corporation; journal entries for holdings of marketable equity securities.)
6/13/Year 6
Marketable Securities (Security S) ...... 12,000
Marketable Securities (Security T) ...... 29,000
Marketable Securities (Security U) ...... 43,000
Cash ...... 84,000
To record acquisition of marketable equity securities
as a temporary investment.
10/11/Year 6
Cash ...... 39,000
Realized Loss on Sale of Security U Available for
Sale (IncSt) ...... 4,000
Marketable Securities (Security U) ...... 43,000
To record sale of Security U.
12/31/Year 6
Marketable Securities (Security S) ($13,500 –
$12,000) ...... 1,500
Unrealized Holding Gain on Security S
Available for Sale (SE) ...... 1,500
To revalue Security S to market value.
12/31/Year 6
Unrealized Holding Loss on Security T Available
for Sale (SE) ...... 2,800
Marketable Securities (Security T) ($26,200 –
$29,000) ...... 2,800
To revalue Security T to market value.
12/31/Year 7
Marketable Securities (Security S) ($15,200 –
$13,500) ...... 1,700
Unrealized Holding Gain on Security S
Available for Sale (SE) ...... 1,700
To revalue Security S to market value.
12/31/Year 7
Marketable Securities (Security T) ($31,700 –
$26,200) ...... 5,500
Unrealized Holding Loss on Security T Avail-
able for Sale (from 12/31/Year 6 Entry)
(SE) ...... 2,800
Unrealized Holding Gain on Security T
Available for Sale (SE) ...... 2,700
To revalue Security T to market value.
2/15/Year 8
Cash ...... 14,900
Marketable Securities (Security S) ...... 12,000
Realized Gain on Sale of Security S Available
for Sale ($14,900 – $12,000) (IncSt) ...... 2,900
To record sale of Security S.
Unrealized Holding Gain on Security S Available
for Sale ($1,500 + $1,700) (SE) ...... 3,200
Marketable Securities (Security S) ...... 3,200
To eliminate the effects of changes previously re-
corded in the market value of Security S.
8/22/Year 8
Cash ...... 28,500
Realized Loss on Sale of Securities Available for
Sale (Security T) ($28,500 – $29,000) (IncSt) ...... 500
Marketable Securities (Security T) ...... 29,000
To record sale of Security T.
Unrealized Holding Gain on Security T Available
for Sale (SE) ...... 2,700
Marketable Securities (Security T) ...... 2,700
To eliminate the effects of changes previously re-
corded in the market value of Security T.
11.42 (Zeff Corporation; reconstructing transactions involving marketable securities.)
Cash Marketable Securities
√ 14,000 √ 187,000
10,000 (1)
(2) 1,000 3,000 (1)
20,000 (3) (3) 20,000
√ 195,000
Net Unrealized Holding Realized Gain on
Gain on Securities Sale of Securities
Available for Sale Available for Sale
12,000 √
(1) 3,000 4,000 (1)
1,000 (2)
10,000 √ 4,000 √
(1) Sale of marketable securities during Year 2.
(2) Revaluation of marketable securities on December 31, Year 2.
(3) Purchase of marketable securities during Year 2.
11.44 (Callahan Corporation; effect of various methods of accounting for marketable equity securities.)
a. Trading Securities
Year 1 Year 2
Income Statement:
Dividend Revenue ...... $ 3,300 $ 2,200
Unrealized Holding Gain (Loss):
($54,000 – $55,000) ...... (1,000) --
($15,000 – $14,000) ...... -- 1,000
Realized Holding Gain (Loss) ($14,500 +
$26,000) – ($16,000 + $24,000) ...... -- 500
Total ...... $ 2,300 $ 3,700
Balance Sheet:
Current Assets:
Marketable Securities at Market Value ... $ 54,000 $ 15,000
b. Securities Available for Sale (Current Asset)
Year 1 Year 2
Income Statement:
Dividend Revenue ...... $ 3,300 $ 2,200
Realized Holding Gain (Loss): [$40,500 –
($18,000 + $25,000)] ...... -- (2,500)
Total ...... $ 3,300 $ (300)
Balance Sheet:
Current Assets:
Marketable Securities at Market Value ... $ 54,000 $ 15,000
Shareholders’ Equity:
Net Unrealized Holding Gain (Loss) on Se-
curities Available for Sale:
($54,000 – $55,000) ...... (1,000) --
($15,000 – $12,000) ...... -- 3,000
c. Same as Part b. except that the securities appear in the noncurrent assets section of the balance sheet.
d. Trading Securities Available for Sale
Securities Current Assets Noncurrent
Assets
Year 1 $ 2,300 $ 3,300 $ 3,300
Year 2 3,700 (300) (300)
Total $ 6,000 $ 3,000 $ 3,000
The unrealized gain on Security I of $3,000 (= $15,000 – $12,000) at the end of Year 2 appears in income if these securities are trading securities but in a separate shareholders’ equity account if these securities are securities available for sale (either a current asset or a noncurrent asset). Total shareholders’ equity is the same. Retained earnings (pretax) are $3,000 larger if these securities are trading securities and the unrealized holding gain account is $3,000 larger if these securities are classified as securities available for sale.
Additional Questions (if required or interested)
11.15 Like 11.16
11.40 Lots of journal entries and financial statement presentation
11.43 Behaves a little like 11.42, be careful. (you determine gains and losses, but maybe not using t-accounts).
Prepared by Gavin Cassar [ Monetary Assets ] Page 5