U.C. Berkeley
Haas School of Business
Chapter 6, SW
April 12, 2001
Spring 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)
..........................
Marketable Securities (Security T)
.........................
Marketable Securities (Security U)
.........................
Cash
..............................................................
To record acquisition of marketable equity securities
as a temporary investment.
10/11/Year 6
Cash
..................................................................
Realized Loss on Sale of Security U Available for
Sale (IncSt)
.....................................................
Marketable Securities (Security U) ................
To record sale of Security U.
Prepared by Gavin Cassar
[ Monetary Assets ]
12,000
29,000
43,000
84,000
39,000
4,000
43,000
Page 1
U.C. Berkeley
Haas School of Business
Chapter 6, SW
April 12, 2001
12/31/Year 6
Marketable Securities (Security S) ($13,500 –
$12,000)
..........................................................
Unrealized Holding Gain on Security S
Available for Sale (SE)
..............................
To revalue Security S to market value.
12/31/Year 6
Unrealized Holding Loss on Security T Available
for Sale (SE)
....................................................
Marketable Securities (Security T) ($26,200 –
$29,000)
..................................................
To revalue Security T to market value.
12/31/Year 7
Marketable Securities (Security S) ($15,200 –
$13,500)
..........................................................
Unrealized Holding Gain on Security S
Available for Sale (SE)
..............................
To revalue Security S to market value.
12/31/Year 7
Marketable Securities (Security T) ($31,700 –
$26,200)
..........................................................
Unrealized Holding Loss on Security T Available for Sale (from 12/31/Year 6 Entry)
(SE)
........................................................
Unrealized Holding Gain on Security T
Available for Sale (SE)
..............................
To revalue Security T to market value.
2/15/Year 8
Cash
..................................................................
Marketable Securities (Security S) .....................
Realized Gain on Sale of Security S Available
for Sale ($14,900 – $12,000) (IncSt) .....................
To record sale of Security S.
Unrealized Holding Gain on Security S Available
for Sale ($1,500 + $1,700) (SE) .............................
Marketable Securities (Security S) .................
To eliminate the effects of changes previously recorded in the market value of Security S.
Prepared by Gavin Cassar
[ Monetary Assets ]
Spring 2001
BA230B
1,500
1,500
2,800
2,800
1,700
1,700
5,500
2,800
2,700
14,900
12,000
2,900
3,200
3,200
Page 2
U.C. Berkeley
Haas School of Business
Chapter 6, SW
April 12, 2001
Spring 2001
BA230B
8/22/Year 8
Cash
..................................................................
Realized Loss on Sale of Securities Available for
Sale (Security T) ($28,500 – $29,000) (IncSt) .........
Marketable Securities (Security T) ................
To record sale of Security T.
Unrealized Holding Gain on Security T Available
for Sale (SE)
....................................................
Marketable Securities (Security T) ................
To eliminate the effects of changes previously recorded in the market value of Security T.
11.42
(Zeff Corporation;
securities.)
√
reconstructing
Cash
14,000
transactions
√
20,000 (3)
Net Unrealized Holding
Gain on Securities
Available for Sale
12,000 √
(1)
3,000
1,000 (2)
10,000 √
(2)
(3)
√
28,500
500
29,000
2,700
2,700
involving
marketable
Marketable Securities
187,000
10,000 (1)
1,000
3,000 (1)
20,000
195,000
Realized Gain on
Sale of Securities
Available for Sale
4,000 (1)
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.
Prepared by Gavin Cassar
[ Monetary Assets ]
Page 3
U.C. Berkeley
Haas School of Business
11.44
Chapter 6, SW
April 12, 2001
Spring 2001
BA230B
(Callahan Corporation; effect of various methods of accounting for marketable
equity securities.)
a.
Trading Securities
Income Statement:
Dividend Revenue .......... ....................................
Unrealized Holding Gain (Loss):
($54,000 – $55,000) ....... .................................
($15,000 – $14,000) ....... .................................
Realized Holding Gain (Loss) ($14,500 +
$26,000) – ($16,000 + $24,000)......................
Total ........... ................................................
Balance Sheet:
Current Assets:
Marketable Securities at Market Value ... ...
Year 1
Year 2
$ 3,300
$ 2,200
(1,000)
--
-1,000
-$ 2,300
500
$ 3,700
$ 54,000
$ 15,000
Year 1
Year 2
$ 3,300
$ 2,200
-$ 3,300
(2,500)
$ (300)
$ 54,000
$ 15,000
b. Securities Available for Sale (Current Asset)
Income Statement:
Dividend Revenue .......... ....................................
Realized Holding Gain (Loss): [$40,500 –
($18,000 + $25,000)] ...... ................................
Total ........... ................................................
Balance Sheet:
Current Assets:
Marketable Securities at Market Value ... ...
Shareholders’ Equity:
Net Unrealized Holding Gain (Loss) on Securities Available for Sale:
($54,000 – $55,000) ...... ..............................
($15,000 – $12,000) ...... ..............................
c.
(1,000)
--
-3,000
Same as Part b. except that the securities appear in the noncurrent assets
section of the balance sheet.
d.
Trading
Securities
Year 1 ...............................$
Year 2 .................................
Total ............................
Prepared by Gavin Cassar
2,300$
3,700
$6,000
[ Monetary Assets ]
Securities Available for Sale
Current Assets
Noncurrent
Assets
3,300$
(300)
$3,000
3,300
(300)
$3,000
Page 4
U.C. Berkeley
Haas School of Business
Chapter 6, SW
April 12, 2001
Spring 2001
BA230B
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