Marketable Securities

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  • #1434582
    LD
    Participant

    Does anyone have a chart they can share for marketable securities? I don’t understand this topic at all and am trying my best to process Becker’s chapter on this but am really getting no where. Hoping someone could help

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  • #1434590

    Any specifics?

    #1434605
    LD
    Participant

    anything and everything! the only concept I understand is that trading and AFS are recorded at FV. I can't seem to get any question right on what accounts to use and when, in terms of unrealized vs realized gains, or when something is impaired, reclassified, etc. I see Becker's chart on reclassification but then get a question and because of a loss recorded earlier the chart doesn't apply the same way. I can't seem to get the relationship of the accounts and what the entries are when you buy, sell, or the value changes for each type. A lot of people talk about “writing the charts out” to help them understand this topic

    AUD - 83
    BEC - 85
    FAR - 80
    REG - 75
    Done!! Woohoo!
    #1434620

    Hmmmmm….so that is a lot of material. I'm guessing you are using a recent version of Becker's textbook. I would suggest going over the comprehensive example on page 8 of F3.

    It is important to know the key differences between Trading and AFS.

    Unrealized Gains and Losses: Income Statement for Trading, OCI for AFS
    Realized Gains and Losses: (Sale Price – Most Recent FV) for Trading, (Sale Price-Cost) for AFS

    There is a Becker SIM that deals with different transactions with AFS and Trading securities and it is pretty good at showing you the journal entries.

    My main suggestion is to keep pounding on it. You will eventually see the flow of gains and losses and how each security behaves. Make sure you get it down, though. This is a pretty important topic.

    #1434951
    LD
    Participant

    Thanks, Wondering if you can clear this up – Becker's MCQ solution says:

    Rule: When marketable equity securities are transferred between trading and available-for-sale, the transfer is made at fair value, and the difference (if any) is recorded as unrealized loss and charged to the income statement. The new carrying amount becomes the basis for any future gain or loss.

    But the book's table says when going from trading to any other, no adjustment is needed for unrealized gains/losses

    am I missing something?

    AUD - 83
    BEC - 85
    FAR - 80
    REG - 75
    Done!! Woohoo!
    #1434971

    It depends on what direction you are going. When a trading security is moved to AFS, there is already an unrealized loss recognized in the I/S. That means it is moved over to the AFS category as is.

    AFS are a little different. Remember, the gains and losses for AFS securities are in OCI at that point. They have been bypassing the income statement because that's how AFS securities are treated. So…when we reclassify them as trading securities, we have to take the unrealized loss that is in OCI and recognize in earnings AKA the Income Statement.

    Break it down and think of the rule of conservatism when in doubt. If we are holding securities that we plan to sell real soon, it makes sense for us to recognize unrealized gains and losses on trading securities in income since they are so close to the time we are going to sell them. It also makes sense to have unrealized gains and losses go to OCI for AFS securities since we aren't too sure on what we are going to do with these securities, so marking them to market in the income statement doesn't really make sense. If we didn't have them go to OCI, there would be a long history of gains and losses in our I/S that don't really have meaning. Same goes for the logic for why HTM securities are valued at amortized costs.

    So always keep in mine where a security is, and where its being transferred too. That should help you keep the rules straight.

    Hope that helps!

    #1435026
    LD
    Participant

    hmmm thanks for taking the time. the question I don't understand is this one, which still kind of contradicts the book that states there's no unrealized loss to record, or maybe I'm just misunderstanding

    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?

    Rule: When marketable equity securities are transferred between trading and available-for-sale, the transfer is made at fair value, and the difference (if any) is recorded as unrealized loss and charged to the income statement. The new carrying amount becomes the basis for any future gain or loss.

    AUD - 83
    BEC - 85
    FAR - 80
    REG - 75
    Done!! Woohoo!
    #1435044

    So for these problems you have to keep track of the dates.

    While a trading security, the security was purchased for 650,000.

    Recognize unrealized loss on the Income Statement on 12/31/X1 (still a trading security).

    Now look at the facts. The security was reclassified on June 30, Year 2. We need to mark it to market for the period from January 1, Year 1 to June 30, Year 2. For these 6 months it was still a trading security. So we take the difference from the adjusted cost basis on 12/31/Year 1 and the fair value at June 30, Year 2 and recognize that as an unrealized loss in earnings. From then on, the security is marked to market and gains and losses are in OCI.

    The answer is 45,000.

    #1435050
    Spartans92
    Participant

    @Op, shouldn't there be 45k loss so the entry would be :
    DR: Unrealized Loss 45k
    CR: Valuation account 45K.

    Since the investment was reclassified on June 30. The mark to market value is based on June 30 year 2.

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    #1435053

    Slight typo with a date I wrote. Here is it corrected…

    So for these problems you have to keep track of the dates. I meant to type January 1, Year 2.

    While a trading security, the security was purchased for 650,000.

    Recognize unrealized loss on the Income Statement on 12/31/X1 (still a trading security).

    Now look at the facts. The security was reclassified on June 30, Year 2. We need to mark it to market for the period from January 1, Year 2 to June 30, Year 2. For these 6 months it was still a trading security. So we take the difference from the adjusted cost basis on 12/31/Year 1 and the fair value at June 30, Year 2 and recognize that as an unrealized loss in earnings. From then on, the security is marked to market and gains and losses are in OCI.

    The answer is 45,000.

    #1435058
    LD
    Participant

    Oooooh, I'm getting really thrown off by “no adjustment is needed” vs “a loss is recorded.” So for questions, if the original cost is given, and also a new FV is given on the date of the transfer to an AFS, will I always make an adjustment that affects the income statement? Is that what you mean by “When a trading security is moved to AFS, there is already an unrealized loss recognized in the I/S. That means it is moved over to the AFS category as is?” Still trying to understand where that “already recognized loss” is coming from. I think that means it's recognized when I mark it to market?

    AUD - 83
    BEC - 85
    FAR - 80
    REG - 75
    Done!! Woohoo!
    #1435124
    Skynet
    Participant

    Isn't the CPA License a “Marketable Securities”.

    The certification is very “Marketable” in the fact that is often clients and employers seeks it.

    The certification is can bring “Securities” to one's financial situation from obtaining a great job, bonuses, raises, and higher billable hours.

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