Trading Securities

Instructions

Chart of Accounts

Labels and Amount Descriptions

General Journal

Income Statement

Balance Sheet

Instructions

Southeast Bank invests in trading securities and prepares quarterly financial statements. At the beginning of the fourth quarter of 2018, the bank held as trading securities 220 shares of Eglan Company common stock that originally cost $5,940. At that time, these securities had a fair value of $5,720. During the fourth quarter, the bank engaged in the following trading securities transactions:

Oct. 26	Purchased 340 shares of Farrell Company common stock for $34 per share.
Nov. 26	Sold 220 shares of Eglan common stock for $25 per share.
Dec. 10	Purchased 390 shares of Gray Company common stock for $43 per share.

On December 31, 2018, the quoted market prices of the shares were as follows: Eglan Company, $56 per share; Farrell Company, $38 per share; and Gray Company, $42 per share.

Required:

1.	Prepare journal entries to record the 2018 transactions for the fourth quarter.
2.	Show what the bank reports on its fourth quarter 2018 income statement for these trading securities.
3.	Show how the bank reports these trading securities on its balance sheet at the end of the fourth quarter of 2018.
4.	Next Level What justification does the FASB give for its treatment of unrealized holding gains and losses for trading securities?

Chart of Accounts

CHART OF ACCOUNTS

Southeast Bank

General Ledger

	ASSETS
111	Cash
113	Investment in Trading Securities
121	Accounts Receivable
122	Allowance for Doubtful Accounts
125	Notes Receivable
141	Inventory
151	Supplies
152	Prepaid Insurance

	LIABILITIES
211	Accounts Payable
221	Notes Payable
224	Interest Payable
231	Salaries Payable

	EQUITY
311	Common Stock
331	Retained Earnings
351	Dividends
391	Income Summary

	REVENUE
411	Sales Revenue
431	Interest Income

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
513	Delivery Expense
515	Supplies Expense
521	Advertising Expense
523	Salaries Expense
531	Bad debt Expense
539	Miscellaneous Expenses
540	Interest Expense
895	Loss on Sale of Trading Securities
912	Unrealized Holding Gain/Loss: Trading Securities

Labels and Amount Descriptions

Amount Descriptions
Investment in Available-for-Sale Securities
Investment in Trading Securities (at fair value)
Investment in Trading Securities (at cost)
Unrealized Loss on Increase in Value of Trading Securities

General Journal

Prepare journal entries to record the 2018 transactions for the fourth quarter. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9

Income Statement

Show what the bank reports on its fourth quarter 2018 income statement for these trading securities. Additional Instructions

Southeast Bank

Income Statement (partial)

For the Year Ended December 31, 2018

1
2

Balance Sheet

Show how the bank reports these trading securities on its balance sheet at the end of the fourth quarter of 2018. Additional Instructions

Southeast Bank

Balance Sheet (partial)

December 31, 2018

1	Current assets:
2

FASB requires unrealized gains and losses for trading securities to be reported as a component of income because,