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2 Jun 2018

Trading Securities

Southeast Bank invests in trading securities and preparesquarterly financial statements. At the beginning of the fourthquarter of 2013, the bank held as trading securities 250 shares ofEglan Company common stock that originally cost $6,875. At thattime, these securities had a fair value of $6,500. During thefourth quarter, the bank engaged in the following tradingsecurities transactions:

Oct. 26 Purchased 280 shares of Farrell Companycommon stock for $35 per share.

Nov. 26 Sold 250 shares of Eglan common stock for $24 pershare.

Dec. 10 Purchased 460 shares of Gray Company commonstock for $40 per share.

On December 31, 2013, the quoted market prices of the shareswere as follows: Eglan Company, $52 per share; Farrell Company, $38per share; and Gray Company, $39 per share.

1. Prepare journal entries to record the preceding informationfor the fourth quarter. For compound entries, if an amount box doesnot require an entry, leave it blank.

2013 investments in trading securities $?????
Oct 6 cash $?????
Nov 26 cash $?????
loss on sale of trading securities $?????

investments in trading securities

 $?????
Dec 10 investments in trading securities $?????
cash $?????
Dec 31 investments in trading securities $?????
unrealized holding gain/loss: trading securities $?????

2. Show what the bank reports on its fourth quarter 2013 incomestatement for these trading securities.

loss on sale of trading securities $?????
unrealized holding gain $?????

3. Show how the bank reports these trading securities on itsbalance sheet at the end of the fourth quarter of 2013.

current assets:

investments in trading securities (at fair value) $?????

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Lelia Lubowitz
Lelia LubowitzLv2
3 Jun 2018

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The investment manager of 4th National Bank invests some of thebank’s financial resources in trading securities. During the lastquarter of 2016, the following transactions occurred in regard tothese trading securities:

Nov.5 Purchased 200 shares of MorganCompany common stock at $86 per share.
19 Purchased 300 shares of ParkerCompany preferred stock at $63 per share.
29 Sold 100 shares of Morgan Companycommon stock at $89 per share.
Dec.15 Purchased 400 shares of TathemCompany common stock at $37 per share.
17 Sold 100 shares of Parker Companypreferred stock at $62 per share.

On December 31, 2016, the market values of the shares were asfollows: Morgan, $87 per share; Parker, $61 per share; and Tathem,$37.25 per share. The bank held no trading securities at thebeginning of the last quarter of 2016.

Required:

1. Prepare journal entries torecord the preceding information.
2. Show what the bank reports onits fourth quarter 2016 income statement for these tradingsecurities.
3.

Show how the bank reports these trading securities on itsDecember 31, 2016, balance sheet.
Gray, Inc. managementoccasionally invests idle cash in stocks that are not intended tobe held long term.
Management treats these investments as tradingsecurities.
1/5/2015 Purchased 4,000 shares of Gold Corporation commonstock, which constitutes less than 10% of the outstanding
shares of the company for $43.00 per share cashplus a total broker commission of $150.
6/15/2015 Received a cash dividend of $1.75 per share.
12/15/2015 Received a cash dividend of $1.80 per share.
12/31/2015 The market value of the stock is $50 per share asof year end, and a commission of $150 would apply to sell theshares.
1/22/2016 Sold 2,000 shares of Gold Corporation common stockfor $51 per share minus $120 commission.
Instructions: Prepare Journal entries for the abovetransactions.
Solutions:
Date Account Debit Credit
1/5/2015 Trading Securities 172,150
Cash 172,150 $43.04 cost per share with commission.
(4,000 x $43) + $150 You would need this information if you sold lessthan all shares later.
Cost per share = $172,150 / 4,000 = $43.04
7/15/2015 Cash 7,000
Dividend Revenue 7,000
4,000 sh x $1.75
12/15/2015 Cash 7,200
Dividend Revenue 7,200
4,000 sh x $1.80
12/31/2015 Trading Securities 27,700 $49.96 updated carrying value per share.
Unrealized Gain on Trading Securities 27,700
[(4,000 x $50) - $150] = $199,850 - $172,150
New cost per share = $199,850 / 4,000 = $49.96
1/22/2016 Cash 101,880
Trading Securities 99,925
Realized Gain on Trading Securities 1,955
(2,000 x $51) - $120 = $101,880
2,000 x $49.96 = $99,925

Ty Koon, Harry Pitts and Eileen Dover are the founders of Sharpe Incorporated. The charter of the corporation authorized 500,000 shares of $5 par common stock, and 50,000 shares of $40 par, 5%, preferred stock. The company began business on January 1 of the current year.

Selected transactions completed by Sharpe Incorporated during the fiscal year-ending December 31, 2013, are as follows:

Jan 1 Issued 16,000 shares of $5 par common stock at $18, receiving cash.

Jan 1 Issued 7,200 shares of $40 par preferred 5% stock at $42 for cash. The dividends are payable semi-annually.

Jan 31 Purchased a two-year insurance policy for $34,080.

Feb 1 Purchased equipment for $290,000 in exchange for paying $50,000, issuing a $50,000, 180-day, 5% note payable, and issuing 9,500 shares of common stock.

May 1 Purchased 1,200 shares of the company’s own common stock at $22 per share.

June 1 Declared a cash dividend at the stated amount on the preferred stock.

June 30 Paid the cash dividend on the preferred stock.

July 1 Issued $1,000,000 of 9-year, 8% bonds with interest payable semiannually. The amount of cash received was $1,092,880.

July 30 Paid the amount due on the note payable signed on February 1.

Aug 1 Sold 450 shares of treasury common stock purchased on May 1 for $26 per share.

Oct 1 Purchased 30,000 of the 100,000 outstanding shares of Precision Corporation for $5.10 per share, plus a $125 commission to the stockbroker.

Oct 16 Sold 250 shares of treasury common stock purchased on May 1 for $20 per share.

Nov. 1 Borrowed $36,000 from Second Bank by issuing a 90-day, 7% note.

Dec 15 Declared a cash dividend at the stated amount to preferred stockholders and $.50 per share on the outstanding common shares. The date of record is December 30, and the dividend is payable January 15, 2014.

Dec 31 Record revenue for the year of $1,975,000, receiving $500,000 in cash with the remainder on account.

Dec 31 Record expenses for the year (one compound entry). All were paid in cash, except for $30,000 on account.

Rent $170,000

Utilities 13,200

Salaries 760,000

Payroll tax expense 45,600

Advertising 120,000

Medical insurance 32,000

Commissions 63,000

Legal and accounting 18,000

Miscellaneous 8,400

Dec. 31 Paid the semiannual interest and amortized the premium on the bonds issued on July 1.

Dec. 31 Received a cash dividend from Precision Corporation of $0.10 per share.

Dec. 31 Precision Corporation reported earnings of $25,000 for the period from October 1 to December 31.

Adjusting Entries

(1) The employees’ accrued vacation pay at the end of the year was $26,000.

(2) Record depreciation on the equipment purchased on February 1, using the straight-line method. The equipment has an estimated 9-year useful life and an estimated residual value of $13,520.

(3) Record insurance expired on the policy purchased January 31.

(4) Record interest accrued on the note payable (November 1).

1). Write a Income Statement

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