7. Receivables and Investments
Trading Securities
1
concept
Purchasing Trading Securities
3m
Play a video:
Was this helpful?
All right now, let's go through all the details and the journal entries for trading securities. So remember a trading security. This is a short term investment that we expect to sell within the near term through active trading. Right? We're going to actively be trading these securities. So, trading securities, they're gonna earn income from dividends when we receive dividends, right, dividends received and the changes in fair value. Okay, so remember fair value. This is the market price of the investment. So if the market price of the investment goes up or down, well, we're gonna take gains or losses based on those changes in fair value. Okay. So remember when we talk about the classification, well, this is on the balance sheet, the balance sheet classification. These are gonna be current because we're planning on selling them in the short term. We were planning on getting rid of them soon. So they're gonna be current assets. And the initial measurement, we're always gonna measure our investments at cost initially. And then we're gonna adjust them accordingly based on the type of investment. So the subsequent measure measurement for a trading security keep doing far is at fair value. Okay. We're going to show on our balance sheet later on after we've purchased it. We're gonna adjust the value to fair value. And the unrealized gains or losses. So unrealized means have not sold right. We have not sold the investment yet. These are gonna show up on the income statement. So those changes in fair value those gains or losses are gonna show up on the income statement. Um, even before we sell the the trading security. So let's go ahead and do our cost. Excuse me? Our cost uh journal entry when we first purchased the trading security. So let's follow an example here on november 1st year one abc company purchased 500 shares of X. Y. Z. Company Common stock at a price of $60 per share. Abc company expects to sell the securities in the near future. So they told us it's in the near future. They didn't specifically say it's a trading security, but we can assume it's a trading security because of this terminology. Okay, so we purchased 500 shares of stock at $60 per share. Well, we want to find the total amount of our investment. How much money did we spend? Well, the cost is going to equal the 500 shares that we bought times $60 per share that we paid. And that's gonna come out to 30,000. Right, we spent 30,000 on this stock. So that's the number that we need in our journal entry. We have to create an asset for the investment of 30,000. And we paid for it in cash. So journal entry, we're probably used to by now is we're going to debit our investment, we're going to debit what we purchase. So it's gonna be investment and I like to be a little bit um a little bit more transparent. So I always say something like investment in trading securities, but we'll say investment in T. S. for trading securities, right? Investment in T. S. That's our um asset that we just created. And that's gonna be a debit for 30,000. And the other side of this is the cash, right? We paid cash so we need to get the cash off of our books with the credit And that's gonna be for 30,000 as well. Right? The amount of money that we spent on the investment. So all we did was trade one asset for another right we spent cash to get an asset. So we're gonna have our investment account Increased by 30,000 And our cash decreased by 30,000. So that's just our total assets are gonna stay the same. It's just which assets we have. Nothing too crazy there. Let's pause and then we'll try the next journal entry.
2
concept
Dividend Revenue for Trading Securities
2m
Play a video:
Was this helpful?
Alright, so the next journal entry that we may need to make is an entry for the dividend revenue if we receive any dividends from our investment. Well that's going to be revenue to our company. So let's check out an example on december 10th year one X. Y. Z. Company declared and paid a dividend of $1 per share. So in the previous entry we had purchased 500 shares, right? We had purchased 500 shares and these 500 shares are going to receive a dividend of $1 per share. So $1 per share dividend, that means we're going to receive from the 500 shares, times $1. Well we're gonna earn $500 from this investment and this is gonna be received in cash, right? They paid a dividend of a dollar per share. So each share is gonna receive $1. So that means we're gonna receive cash. So our debit is gonna be cash for 500 and our credit here is gonna be to dividend revenue. Okay so this is revenue to the company, we we bought this investment to try and earn money and this is us earning that money through this dividend revenue. And I want to make a quick point about dividend revenue because it's not our typical revenue right? Our company is not necessarily like an investment bank or some sort of brokerage where we're trying to make money on on investments like this, this is kind of a side thing we're doing with some X. Extra cash. So this is not our operating revenue. Okay so maybe this company is a t shirt company that sells t shirts. Well, we would show our revenue from selling t shirts at the top of our income statement. This revenue would be shown after our operating section. It would be shown in like our other um maybe like our non operating expenses and non operating revenues, gains and losses. So this would be shown after our operating section of our income statement. Okay, so it's not included with all our revenues, uh where we calculate gross profit and everything like that. So it's still revenue to the company, it's just not our core business, we're not an investment company. This is just a side thing that we're doing. Cool, so this isn't too complicated. We got some cash, we earned some dividend revenue. So let's go ahead and put it in here. Cash went up by $500 and we earned revenue. We earned that dividend revenue. That's gonna go to our income statement, and that's going to increase our equity by $500 as well. Cool, so that's about it for our dividend entries. We just have to find out what's the total amount that we received and that's what we're gonna receive as cash and put into our journal entry. Cool, let's go ahead and move on to the next journal entry
3
concept
Unrealized Gains and Losses for Trading Securities (1)
6m
Play a video:
Was this helpful?
So we've talked about unrealized gains and losses a little bit so far, and we're gonna have to be adjusting our our value of the investment based on the fair value, right? And this is going to happen on the reporting dates. So if say we bought, for example, this investment we bought in November and now it turns to be the end of the year. Now it's December 31 and we're about to release our balance sheet. Well, we have to update the value of the investment based on the balance sheet date for these trading securities. Okay. And I want to make a note because this is the difference between this is the main difference between a trading security and available for sale security is where we put the unrealized gains and losses for the trading securities. They're gonna show up on the income statement. Okay, So nothing too crazy when it comes to trading securities, it just shows up on the income statement, like we're used to, Okay, so when do we show a gain or a loss? Well, we show a gain if the price has increased since we bought it, right? We bought it at a lower price and now it's worth more. Well, we have a gain and the opposite. If we bought it at a high price and it fell, that would be a loss. So if the market price of the investment has increased since the last, since the last valuation, then we have an unrealized gain. Okay, Because at this point why we say it's unrealized is because we haven't sold the investment, we're still holding it. We haven't realized this gain, realizing it is when we sell the investment and we actually have this gain happen because we no longer own the investment. It's unrealized when it's just a change in value while we're still holding it. Think about maybe some stock that you've bought in the past, maybe you're a savvy investor and you've bought some stock and you're just sitting on the stock, you've seen that it's gone up in value but you haven't sold it yet. Well, you have unrealized gains on that investment. Okay. So if the market price has decreased, well that's the opposite, right? If the market price has decreased since the last revaluation and I say last revaluation because this might not be the first time that we're revaluing it to fair value. We're gonna be constantly doing this every time we release financial statements. Okay, so in this case we would have an unrealized loss. So we're gonna have to keep track of what the value of the investment is and keep track of those changes in the value. Okay, So let's let's do an example here on december, 31st year one X, Y. Z. Company's stock had a market value of $65 per share. So the market value of the stock had increased, right? We had originally purchased 500 shares At a price of $60, right? And that came out to 30,000 was our original investment, but now those $60, those 500 shares are no longer worth $60. If we chose to sell those investments today, we would get $65 per share, not just 60. Right? So there's an unrealized gain in this situation. The price has gone up since we purchased them. So we have to find out what is the amount of the unrealized gain? It's not gonna be the total amount of what it's worth now. It's gonna be the change from what it was worth before to what it's worth now. So let's see what it's worth now. 500 shares, times $65 Right? That's what it's worth. Now, let me get out my calculator. No need to do difficult math. 500 times 65. That comes out to 32,000 500. Okay, 32,500 is what it's worth now. So clearly, we have an unrealized gain, right? This investment has increased in value, but it's not like we received cash or anything, there's no receipt of cash. So what we want to do is we're gonna adjust the value of the investment right now, the investment is sitting on our books for 30,000. What we want to change it so that it shows that the value is 32,500. So what we're gonna do, Notice that the difference between these two, the difference between them is 2500. Right? That's the change in fair value. So it was sitting on our books for 30,000. But we wanted to say on our books that it's 32,500. So this change in the fair value. That's what we want to put into our journal entry. So what we're gonna do is we're going to debit the investment. So, remember we had our investment in in trading securities. This is the asset that we created when we first purchased the investment in our first journal entry. We have debited the investment for 30,000 because that's what we paid for it. Well, now we're debating it again to increase the value up to the fair value. So we're going to debit it by 2500. Okay. And the credit in this situation? Well, the credit is going to be the unrealized gain. So, remember, we're gonna have an unrealized gain and this unrealized gain, I'm gonna put it here that it goes to the income statement, right? Because we're gonna have a situation when we deal with available for sale securities, that they don't go to the income statement. They go to other comprehensive income. But for trading securities, it's just on the income statement. And it would show up generally in that same section where we show dividend revenue after our operating right? This is this is a non operating thing again, because this isn't part of our core business. This will show up after our operating income in that other section where we show other things that were involved in. Cool. So we're gonna increase the value of our investment. So our assets go up By 2500 and we're gonna have an unrealized gain, and this is part of equity, right? This is going to our income statement and it's increasing our income. Mhm. So the unrealized gain is going to increase our income, which increases our equity 2500 there as well. Okay, I'll scroll down a little bit so you can see that. Alright, so we're gonna have an increase in assets increase in equity, and that's our journal entry. We need to find what the change in the fair value was, and we're gonna have to adjust our investment account to that change in fair value. Cool. Alright. Let's pause here and then we'll continue with these T accounts down below
4
concept
Unrealized Gains and Losses for Trading Securities (2)
6m
Play a video:
Was this helpful?
Alright. So let's summarize what we've done so far in this, in this T. Account here for the investment. So we're gonna have the investment in trading securities T. Account. And well over here we'll deal with our unrealized gains and losses just to see where the other side of this is going on. Okay. So the investment and trading securities, remember when we purchased it in our first journal entry, we purchased them for 30,000, right? We purchased them for 30,000 in cash. So it had a balance, we had a debit balance of 30,000. And then in the previous entry right above here we did an entry for the unrealized gain or loss for the fair value change. Right? So at that point we increased the investment by another 2500. Right? Because of the change in fair value. And that was that entry was a debit to the investment and a credit to the unrealized gain or loss. And this was on the income statement here, right? This this unrealized gain and loss was on the income statement. So we showed on our income statement this this unrealized gain and we increase our investment by that amount. So now let's see what happens in our next journal entry. So now it's the end of the next year, let's say we've held this investment for a while now it doesn't really matter. It's still a trading security even though we've ended up holding it longer than we expected. Uh This is just for the example on december 31st year to X. Y. Z. Company's stock had a market value of $50 per share. So notice what's happened here in our in our t. Account at the end of year one. So 12 31 year one we had a value in the account of 32,500. Right? That was the fair value as of that date. But now at the end of year two the value has dropped to $50 per share. Right at this 32,500 valuation. That was that was at a value of $65 per share. But now the value has dropped. So we're gonna have an unrealized loss and we need to change the fair value of our investment down to that fair value. Okay so this is where it gets tricky is where it kind of stacks on top of each other. Right now we're sitting at a value of 32,500. We need to get that value down to the $50 per share. So let's see what our investment would be at $50 per share. So we bought 500 shares, initially times the $50 per share. So let's see what that comes out to 500 times $50 per share. Well that comes out to 25,000 right? Our investment is now worth 25,000 but it's sitting on our books up here in our t account for 32,500. So we need to change the value to this 25,000 by decreasing it from the 32,500 value. And we have to see what's the difference here? Well, it's gonna be a decrease of 7500. Right? And that's the change right there. Let me do it in a different color. Right? Here is the change in fair value, right? It was sitting on our books Notice, we're not doing it from the original purchase anymore. We had already adjusted it to this new value of 32,500. Well now we have to reduce it from that new value right from 32,500 is where we have to reduce it now down to 25,000. So what we need in our journal entry is a reduction to the investment account, right? So when we wanted to increase the investment account, we were debating it now we want to decrease it with a credit. So our credit in this case is gonna be to the investment In trading securities. And that's gonna be for the 7500 change in the fair value. What's gonna be the debit in this case? We haven't sold the investment yet, right? We haven't realized any gains or losses. We have an unrealized loss, right? Our our investment has lost value but we haven't sold it yet. So it's an unrealized loss. And when we're dealing with trading securities. Where does this unrealized loss show up on the income statement, right. And that's gonna be the same amount, 7500. So let me get out of the way and we'll finish this up. So our assets here are investment asset has decreased by 7500. And our equity, we took a loss that's gonna lower our income and lower our equity. This unrealized loss is lowering our equity by that same 7500. Okay. So now if I go back to my T. Accounts up here, let me come back in. Let's go back to our T. Accounts and let's fill in uh what just happened. So now we had a decrease of the investment, right? We credited the investment account. And that's what's gonna show up here in our T. Account, we're gonna decrease our investment by 7500. And that's gonna get us to our new value as of December 31 year too. We're gonna have the correct value of 25,000 at the fair value of the investment, right? They're only worth $50 per share. So we want to show on our balance sheet that value of 25,000. So in our year one income statement, we would have shown this 2500 gain and in our year to income statement we would show a a 75 100 loss, right, that's in the in the year two income statement, we would have this loss for 7500. Cool. So the main thing here is to keep track of your fair value, especially if multiple periods are going on. Generally when you deal with this in your class, it's just gonna be one change in fair value. But I just wanted to show you how this progresses, right? I wanted to give you the full picture of how this can happen and uh this is what you do. You keep track of the fair value and change in fair value is what goes into your journal entry. Okay. So the change in fair value from the last revaluation is what needs to go into your journal entry. Cool. Let's go ahead and wrap up the Trading securities with a few more journal entries.
5
concept
Realized Gains and Losses on Sale of Trading Securities
5m
Play a video:
Was this helpful?
Alright. So now we finally reach the day that we sell the investment, we're gonna have a realized notice. Now we take a realized gain or loss on the date of sale. Okay. And these realized gains or losses, they will always show up on the income statement. So it's only when we're dealing with the unrealized gains or losses that there's gonna be different treatment for trading securities and available for sale securities. But all securities when we have a realized gain or loss that's gonna show up on the income statement. Okay. So what we have to take into account is what was the last valuation that we did of the stock? Right? Because the investment is going to be sitting on our books based on our last valuation, right? We might have bought it at a certain cost and then we would have written it up or down based on the fair value changes. So the last time we adjusted the books, that's what it's going to be sitting on our books for. Right, is that last revaluation? And we have to compare the selling price to that last revaluation. So if the selling price is has is higher than the last revaluation, then we're gonna have a realized gain and the opposite if the selling price is lower than the last revaluation. Well, we're gonna have a realized loss. That should make sense right? If we sell it for less than what it's on the books, it's a loss. If we sell it for more than what's on the books? It's a game. Cool. So let's go ahead and finish here on february 12th year three abc company sold its investment in X. Y. Z. Stock at a market value of $70 per share. So if you remember in our t. Account on the previous page we had ended in a situation where we had 500 shares sitting on our books for $50 per share at a price of 25,000 total. Right? There was a 25,000 total sitting in the investment account for the the last fair value revaluation. But now we're finally selling the stock, we're selling the stock at $70 per share. So 500 times the $70 selling price. Well 500 times 70 that's gonna come out to 35,000. Right? So 500 times 70 is 30,000. So we sold it for 35,000 but we sold something that was worth 25,000 to us. Right? We sold it for 35,000. It was sitting on our books for 25,000. So the change here was 10,000. Right? And this 10,000 this is the realized gain That we have in this situation right? Because the price had gone up or we obviously have a gain we have we sold it at a realized gain of 10,000. Okay, So remember it's the change in the fair value not the total amount we sold it for even though we're gonna receive 35,000 in cash. Well we have to get the investment off of our books for 25,000 and the remainder is a game. So the trick here with this journal entry is that there's a few moving parts. This right here The selling price, this is gonna be the cash that we received. Right? We're gonna receive 35,000. We sold 500 shares at $70 per share. Well, we're gonna receive 35,000 but we have to get the investment off of our books and it was sitting At this 25,000 on our books. So we need to get rid of that. And then the remainder is the game the 10,000 difference. So let's go ahead and do that. We know that we received cash of 35,000 because we sold the investment for 35,000. Now we have to take the investment off of our books that is sitting on our books for 25,000 investment in trading securities 25,000. And the difference between the two right? The difference between what we sold it for and what it was on our books. That's the gain right? The game that's going to our income statement. So we would say gain on sale of investment. So notice since now it's a realized gain, we don't say realized gain, you could say realized gain but this is this is generally the way you're going to say it gain on sale of investment. Let me move these numbers over. So our debit was 35,000 to cash, credit 25,000 to the investment. And then we have the 10,000 gain that's going to our income statement. And again this gain, it's still non operating right? It's not gonna go into our operating section of our income statement where we show our actual operations, this is gonna go after our operating income in that other section where we show other activities that we do such as investments. Okay, So that's it here. This is what happens if we sell it at a game. Um let's go ahead and fill this in. We received cash of 35,000. So our assets go up by 35,000, but our assets also go down By 25,000. Right, so we have a net increase in our assets of 10,000 from this uh extra cash. And we have this gain on the sale That goes to our equity, this increases our income, that increases our equity. So our equity goes up by 10,000. Our assets go up by a net amount of 10,000 as well. Cool, Alright, so that's uh an overview of all the different journal entries that will make with trading securities. Let's go ahead and do a practice problem here
6
Problem
ProblemReset Company held investments in trading securities with a fair value of $180,000 as of December 31, 2017. Reset had originally purchased the investments at a price of $152,000 on January 1, 2017. What is the appropriate amount for Reset to report for these investments on its December 31, 2017 balance sheet?
A
$180,000
B
$152,000
C
$28,000 gain
D
Cannot be determined
7
Problem
ProblemChitty Company often has excess cash on hand to invest. Suppose that Chitty purchases 640 shares of Bang Company common stock at a price of $35 per share. Chitty expects to hold the stock for under three months and then sell it. This purchase occurred on December 9, 2018. As of December 31, the market price of Chitty stock had increased to $41 per share. Chitty's journal entry on December 31, 2018 related to the investment in Bang Company stock would include:
A
A debit to Unrealized Gain on the Income Statement for $3,840
B
A debit to Investments on the Balance Sheet for $3,840
C
A credit to Unrealized Gain in Other Comprehensive Income for $3,840
D
A debit to Cash for $3,840