The investments of Charger Inc. include a single investment: 14,500 shares of Raiders Inc. common stock

The investments of Charger Inc. include a single investment: 14,500 shares of Raiders Inc. common stock purchased on February 24, 2014, for $38 per share including brokerage commission. These shares were classified as trading securities. As of the December 31, 2014, balance sheet date, the share price had increased to $42 per share.

a. Journalize the entries to acquire the investment on February 24, and record the adjustment to fair value on December 31, 2014.

b. How is the unrealized gain or loss for trading investments reported on the financial statements?


Answer:

a. 2014
Feb. 24 Investments—Raiders, Inc. Stock 551,000
Cash 551,000
14,500 shares × $38 per share.
Dec. 31 Valuation Allowance for Trading
Investments 58,000
Unrealized Gain on Trading
Investments 58,000
To record increase in fair value of
trading investments, 14,500 shares ×
($42 per share – $38 per share).

b. The unrealized gain or unrealized loss for trading investments is disclosed in the income statement as “other income” (or a separate item if significant). Unrealized losses would be deducted in determining net income, while unrealized gains would be added in determining net income.