MA-4 (Static) Recording a Bond Investment Held as Trading Securities LO A-1 On January 1, 2018, Brian Company purchased at par $800,000, 6 percent bonds issued by Laura Company to be actively traded. At December 31, 2018, the bonds had a fair value of $775,000. The bond investment was sold on July 1, 2019, for $802,000. Brian Company’s fiscal year ends on December 31.

Record (1) the adjustment of the bond investment on December 31, 2018, and (2) the sale of the bonds on July 1, 2019. Ignore interest. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1. Recognize the fair value of investments $775,000 on December 31, 2018.

2. Recognize the fair value of investments on July 01, 2019.

3. Recognize the cash received from sale of investments on July 01, 2019.

Date/General Journal/Debit/Credit/

The appropriate journal entries to record the adjustment of the bond investment on December 31, 2018, and the sale of the bonds on July 1, 2019 are:

1. December 31, 2018

Debit Unrealized holding loss $25,000

Credit Fair value adjustment- Trading Securities $25,000

($800,000-$775,000)

(To record unrealized loss on trading investment)

2. July 1, 2019

Debit Fair value adjustment-Trading Securities $27,000

Credit Unrealized holding gain $27,000

($802,000-$775,000)

(To record unrealized gain on trading investment)

July 1, 2019

Debit Cash $802,000

Credit  Fair value adjustment-Trading Securities $802,000

(To record sale of trading securities)

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MA-4 Bond Investment Held as Trading Securities

1) Journal Entries:

December 31, 2018:

Debit  Loss on Bond Investment $25,000

Credit Bond Investment (Held as Trading Securities) $25,000

To recognize the fair value of bonds.

July 1, 2019:

Debit Bond Investment (Held as Trading Securities) $27,000

Credit Gain on Bond Investment 27,000

To recognize the fair value of investments.

July 1, 2019:

Debit Cash Account $802,000

Credit Bond Investment 802,000

To recognize the cash from sale of investments.

Explanation:

a) Investments in Debt Securities, e.g. Bonds are classified into i) For Trading, ii) Available for Sale, and iii) Held to Maturity.  They have different account treatments.

b) Debt Securities for Trading are held for short-term profits in the price movements of the investment.  They are accounted for using the Fair Value method.  With this method, the fair value of the investment is recognized and the Gains and Losses at each accounting period are taken to operating income.

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