Accounting for short-term investments

3. Accounting for trading and available-for-sale securities

Accounting for trading and available-for-sale securities is similar. There are four (4) accounting events to consider:

  1. Purchase of marketable securities
  2. Receipt of related cash dividends
  3. Sale of securities (at gain or loss)
  4. Change in the fair value (i.e., market price) of securities at the end of an accounting period

The accounting treatment of the first three events is the same for trading and available-for-sale securities. The only difference between the two types of marketable securities is the accounting for the change in the fair value of the security.

Important to note, we are going to look at a simple example of accounting for trading and available-for-sale securities. We are not going to discuss such topics as transfers between categories, deferred income tax effects, impairments, presentation in the statement of cash flows, disclosures, etc.

3.1. Purchase of trading and available-for-sale securities

When a company purchases trading and available-for-sale securities, it records the short-term investment on the balance sheet at cost. The cost includes the purchase price and any incidental acquisition costs (e.g., brokerage commission, taxes).

Letís assume that on December 1, 20X2 Busy Company (a fictitious entity) bought the following marketable securities:

Marketable security

Cost*

10 shares of ABC Company at $10/share

$100

20 shares of DEF Company at $20/share

$400

30 shares of XYZ Company at $30/share

$900

Total cost

$1,400

(*) Cost includes incidental acquisition costs.

All securities are readily marketable. The company intends to sell the investment in ABC and XYZ Company in the near term. Hence, the investment in the stock of ABC and XYZ Company is classified as trading securities while the investment in DEF Company is classified as available-for-sale securities.

To record the purchase of the trading and available-for-sale securities, the company would make the following journal entry:

Account Titles

Debit

Credit

Trading securities

1,000

 

Available-for-sale securities

400

 

†††† Cash

 

1,400

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