Chapter 14
Illustrated Solution: Problem 14-36
Journal Entries for
Trading Securities
14-1
Problem Background
14-2
Kopson Company

The carrying value of trading securities as a portfolio is
adjusted to market value by using an account titled ”Market
Adjustment—Trading Securities.”

This market adjustment account will have a debit balance if the
total market value of trading securities exceeds their total cost
as of a balance sheet date. Likewise, this market adjustment
account will have a credit balance if the total cost of trading
securities exceeds their combined value as of a balance sheet
date.

Any unrealized gains or unrealized losses on trading securities
is reported on the income statement under “Other Gains” or
“Other Losses.”
Part (a)
14-3
Kopson Company

Any accrued interest on bonds purchased between interest
dates has already been added to the transaction price. When
the purchaser is using the revenue approach to record the
transaction, the Interest Revenue account is debited for the
amount of the accrued interest.

At the date when the interest payment is received on the bonds
(payment will represent 6 months’ worth of interest), this
payment is credited to the Interest Revenue account.

The net effect of the two entries described above allows the
purchaser of the bonds to reflect the proper amount in the
Interest Revenue account.
Part (a)
14-4
Kopson Company
Purchase price of the bonds: = $100,000 x 1.0325
= $103,250
Brokerage fees:
=
Investment in Bonds:
300
= $103,550
Part (a)
14-5
Kopson Company
Purchase price of the bonds: = $100,000 x 1.0325
= $103,250
Brokerage fees:
=
Investment in Bonds:
Accrued Interest:
300
= $103,550
= $100,000 x 10% x 4/12 =
$3,333
Part (a)
14-6
Kopson Company
Purchase price of the bonds: = $100,000 x 1.0325
= $103,250
Brokerage fees:
=
Investment in Bonds:
Accrued Interest:
300
= $103,550
= $100,000 x 10% x 4/12 =
$3,333
Nov. 1 Investment in Trading Securities
—Treasury Bonds………………………… 103,550
Interest Revenue………………………
3,333
Cash…………………………………
106,883
Part (b)
14-7
Kopson Company
When the acquisition cost of the bonds is correctly
restated (with entry made on November 1), the correct
balance required in the market adjustment account as of
December 31 is a credit of $950 ($161,250 - $160,300).
Security
Cost
Market
Fleming Co. stock
$ 25,250
$ 23,350
Dobson Co. stock
32,450
33,950
103,550
103,000
$161,250
$160,300
10% U.S. Treasury bonds
Part (b)
14-8
Kopson Company
Cost……………………………………………………………… $161,250
Market…………………………………………………………… 160,300
Balance required in market adjustment account—credit ….. $
950
Balance in market adjustment account—credit before
adjusting entry……………………………………………….
500
Credit to market adjustment account………………………… $
450
The Market Adjustment—Trading Securities account has a credit
balance of $500 on December 31 before the adjustment. Therefore,
an adjusting entry must be made to credit the market adjustment
account for an additional $450.
Part (b)
14-9
Kopson Company
Cost……………………………………………………………… $161,250
Market…………………………………………………………… 160,300
Balance required in market adjustment account—credit ….. $
950
Balance in market adjustment account—credit before
adjusting entry……………………………………………….
500
Credit to market adjustment account………………………… $
450
The Market Adjustment—Trading Securities account has a credit
balance of $500 on December 31 before the adjustment. Therefore,
an adjusting entry must be made to credit the market adjustment
account for an additional $450.
Dec. 31 Unrealized Loss on Trading Securities………
Market Adjustment—Trading Securities….
450
450
Part (c)
14-10
Kopson Company
Even though the bond interest payment will not be received until
January 1, 2003, Kopson Co. must make an adjusting entry to record
the interest revenue earned as of December 31, 2002.
Dec. 31 Interest Receivable……………………………. 5,000
Interest Revenue……………………………
5,000
Part (c)
14-11
Kopson Company
Even though the bond interest payment will not be received until
January 1, 2003, Kopson Co. must make an adjusting entry to record
the interest revenue earned as of December 31, 2002.
Dec. 31 Interest Receivable……………………………. 5,000
Interest Revenue……………………………
5,000
The cash will be recorded when it is received in 2003. However, this
entry will not have any effect on revenues.
Jan. 1
Cash …………………………………………… 5,000
Interest Receivable…………………………
5,000
Part (d)
14-12
Kopson Company
The entry given for July 1 is correct. All the interest Kopson
Company received in this payment was earned in 2003.
July 1
Cash …………………………………………… 5,000
Interest Revenue .…………………………
5,000
Part (e)
14-13
Kopson Company
Transfer securities from Trading to Available-for-Sale.
Investment in Fleming Company, balances as of Dec. 6:
Cost
$25,250
Market Value
at 12/31/2002
$23,350
Market Adjustment
$1,900
Part (e)
14-14
Kopson Company
1. Remove trading security (recorded at original cost).
Dec. 6
Investment in Trading Securities—
Fleming Co.……………………………………
25,250
Part (e)
14-15
Kopson Company
1. Remove trading security (recorded at original cost).
2. Remove any market adjustment related to the trading
security.
Dec. 6
Market Adjustment—Trading Securities…………. 1,900
Investment in Trading Securities—
Fleming Co.……………………………………
25,250
Part (e)
14-16
Kopson Company
1. Remove trading security (recorded at original cost).
2. Record any market adjustment related to the trading
security.
3. Record the AFS security at market value on the date of
transfer.
Dec. 6
Investment in Available-for-Sale
Securities—Fleming Co.…………………………24,500
Market Adjustment—Trading Securities…………. 1,900
Investment in Trading Securities—
Fleming Co.……………………………………
25,250
Part (e)
14-17
Kopson Company
1. Remove trading security (recorded at original cost).
2. Record any market adjustment related to the trading
security.
3. Record the AFS security at market value on the date of
transfer.
4. Record any unrealized gain or loss on the transfer.
Dec. 6 Investment in Available-for-Sale
Securities—Fleming Co.…………………………24,500
Market Adjustment—Trading Securities…………. 1,900
Investment in Trading Securities—
Fleming Co.……………………………………
25,250
Unrealized Gain on Transfer of Securities…….
1,150
Part (e)
14-18
Kopson Company
1. Remove trading security (recorded at original cost).
2. Record any market adjustment related to the trading
security.
3. Record the AFS security at market value on the date of
transfer.
4. Record any unrealized gain or loss on the transfer.
Dec. 6 Investment in Available-for-Sale
Securities—Fleming Co.…………………………24,500
Market Adjustment—Trading Securities…………. 1,900
Investment in Trading Securities—
Fleming Co.……………………………………
25,250
Unrealized Gain on Transfer of Securities…….
*1,150
*Change in value from 12/31/02 to 12/06/03 ($24,500 – $23,350 = $1,150)
Part (f)
14-19
Adjusting entry for Available-for-Sale Securities
Fleming Co.
stock…………….
Cost
Market
$ 24,500
$ 24,950
Market
Amount in Adjustment
Adjustment Account
Required
$450 Dr.
0
$450 Dr.
Part (f)
14-20
Adjusting entry for Available-for-Sale Securities
Security
Cost
Market
Flaming Co.
stock…………….
$ 24,500
$ 24,950
Market
Amount in Adjustment
Adjustment Account
Required
$450 Dr.
0
Dec. 31 Market Adjustment—Available-for-Sale Securities……. 450
Unrealized Increase/Decrease in Value of
Available-for-Sale Securities…………………
$450 Dr.
450
Part (f)
14-21
Adjusting entry for Trading Securities
Market
Amount in Adjustment
Adjustment Account
Required
Security
Cost
Market
Dobson Co.
stock…………….
$ 32,450
$ 32,650
$200 Dr.
10% U.S.
Treasury bonds..
103,550
103,500
50 Cr.
$136,000 $136,150
$150 Dr.
$950 Dr.
$800 Cr.
$950 Dr.
$800 Cr.
Part (f)
14-22
Adjusting entry for Trading Securities
Market
Amount in Adjustment
Adjustment Account
Required
Security
Cost
Market
Dobson Co.
stock…………….
$ 32,450
$ 32,650
$200 Dr.
10% U.S.
Treasury bonds..
103,550
103,500
50 Cr.
$136,000 $136,150
$150 Dr.
$950 Dr.
$800 Cr.
$950 Dr.
$800 Cr.
Dec. 31 Unrealized Loss on Trading Securities………………
Market Adjustment—Trading Securities…………
800
800
Part (f)
14-23
Entry to record accrued interest on bonds:
Dec. 31
Interest Receivable…………………………………. 5,000
Interest Revenue…………………………………
5,000
Adjusting entry for accrued interest.
14-24
End of Problem