[fanfan22]

I am always confused about calculating the unrealized g/l on trading securities..should it be calculated as market value – cost or changes in market value? The following 2 questions from Becker calculated the unrealized g/l differently:

1. At the end of year 1, Lane Co. held trading securities that cost $86,000 and which had a year-end market value of $92,000. During year 2, all of these securities were sold for $104,500. At the end of year 2, Lane had acquired additional trading securities that cost $73,000 and which had a year-end market value of $71,000. What is the impact of these stock activities on Lane’s year 2 income statement?

– Answer: Gain of $10,500. Which includes realized gain on securities sold of 12,500 (SP 104,000 – CV 92,000) and Unrealized g/l of -2,000 (FMV $71,000-Cost of $73,000).

2. Sun Corp. had investments in marketable equity securities costing $650,000. On June 30, Year 2, Sun decided to

hold the investments indefinitely and accordingly reclassified them from trading to available-for-sale on that date.

The investments’ market value was $575,000 at December 31, Year 1, $530,000 at June 30, Year 2, and

$490,000 at December 31, Year 2. What amount of loss from investments should Sun report in its Year 2 income statement?

– Answer: $45,000 loss should be reported in the Year 2 income statement. Calculation:FMV12/31/YR 1 of 575,000 – FMV 6/30/YR2 of 530,000.

As you can see, the first problem calculated the unrealized g/l using FMV – Cost, and the second question calculated the unrealized g/l using changes in FMV. I don’t understand why it is treated differently. Am I missing anything here? Can anyone please kindly explain?

Thanks.

[2/15 n/30]

Trading & Held-for-sale securities are marked to market during the year. Meaning, if you have a trading security that you bought in Q1 for 10,000 and in Q2 it goes up or down you create a “valuation account”

Trading security goes up to $12,000:

Dr.Valuation Account 2,000

Cr. Unrealized Gain 2,000

Trading Security goes down to $8,000:

Dr. Unrealized Loss 2,000

Cr. Valuation Account 2,000

Only at year end when you close the out the valuation accounts (unless it is a permanent loss) does the unrealized G/L hit the income statement. However, Held-for-sale don't hit the income statement until sold.

So for your 1st problem:

Dec. 31st year 1

You bought Trading securities for 82,000 and they went up to 92,000

Dr. Valuation Account 8,000

Cr. Unrealized Gain 8,000

Closing statement:

Dr. unrealized gain: 8,000

Cr. realized gain: 8,000

You can see the valuation account still has 8,000 in it. Meaning your new basis of trading securities is 92,000 for year 1.

Yr 2

Your T/S raised from 92,000 to 104,500

Dr. Valuation account 12,500

Cr. Unrealized gain 12,500

You bought some more securities:

Dr.Trading securities 73,000

Cr. Cash 73,000

Those securities dropped

Dr.Unrealized loss 2,000

Cr. Valuation account 2,000

At year end you close everything and the realized gains are netted against the realized losses on the income statement

12,500 => realized gain for year 2

(2,000) => realized loss for year 2

10,500 is the net activity for your trading securities

Hope that helps, I kind of did this in a hurry.

Bec: 8/31/12
Aud: 8/1/12
Reg: 76
Far: 73

[jenuno01]

In your example #2 :

You revalue the Trading securities based on closing Market values:

The investments' market value was $575,000 at December 31, Year 1, $530,000 at June 30 (the date you reclassied it)

So it would be 575,000-530,000 = 45,000 loss

Ignore all the extra useless information.

Class of 2012

[jenuno01]

@2/15 I think one of your JE's might be off:

“Yr 2

Your T/S raised from 92,000 to 104,500

Dr. Valuation account 12,500

Cr. Unrealized gain 12,500″

^^ This JE should reflect the sale of the securities as following:

Cash—-104,500

Investment

---

92,000

Realized Gain

---

12,500(plug)

Class of 2012

[2/15 n/30]

Yep, your right. Sorry about that.

Bec: 8/31/12
Aud: 8/1/12
Reg: 76
Far: 73

[jenuno01]

No prob! You did mention you did them fast and gets you to the same answer 🙂

Class of 2012

[2/15 n/30]

What about the valuation account? I think I may have messed up there as well. At EOY do you leave the Valuation account open and close it once the asset is sold? Or do you close it into your trading security account EOY?

Bec: 8/31/12
Aud: 8/1/12
Reg: 76
Far: 73

[jenuno01]

Yep. I think you close it at EOY to increase or reduce the basis of the investment. I guess I always skipped the Valuation account and made the entries directly to the Investment account lol… it was just easier to keep track of the balances.

To the OP, try to figure out the JE and/or the T account while studying for FAR… this will allow you to know how the Financials relate to eachother and will make your life much easier! — Just my $0.02

Class of 2012

[forever4]

Hi!

I think you just have to remember 2 things to be able to do this. For me, everything is so much easier after remember them. And it's not as confusing as other explanation.

1. Trading security unrealized GL from changing FV -> recog in IS

2. Available for sale GL from changing FV -> recog in OCI

That's it.

So for the 1st question. They were asking you what effect in IS. It is trading security -> you include the changing in FV. If it was available for sale -> 0 would be the answer.

For the 2nd question you can apply both of my tips to come up with the answer!

Hope that helps.

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[Author]

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