Accounting for short-term investments

3.2. Receipt of cash dividends

When cash dividends are declared on trading and available-for-sale securities, the company can recognize a receivable and revenue, assuming the company has the legal right to the securities. Once the cash dividend is received, the company would recognize cash received (i.e., exchange for the receivable).

Letís continue our example. On December 15, 20X2 the board of directors of company XYZ declared a cash dividend of $0.50 per share.† On December 15, 20X2 Busy Company would make the following journal entry to record declaration of the cash dividend:

Account Titles

Debit

Credit

Dividend receivable (30 shares x $0.50)

15

 

†††† Dividend income

 

15

Letís assume that on January 5, 20X3 Busy Company received the cash dividend from XYZ Company. The company would make the following journal entry to recognize the receipt of cash:

Account Titles

Debit

Credit

Cash

15

 

†††† Dividend receivable

 

15

3.3. Sale of trading and available-for-sale securities

When trading and available-for-sale securities are sold, the company might recognize either a gain or loss on the sale. The realized gain or loss is determined as the difference between the proceeds from the sale and the book value (i.e., see balance sheet) of the securities. When the proceeds are more than the balance sheet value, a realized gain is recognized; when the proceeds are less than the balance sheet value, a realized loss is recognized.

Letís assume on December 10, 20X2 Busy Company sold 10 shares of ABC Company for $8 per share and 5 shares of DEF Company for $30 per share. Assume that the incidental costs were deducted from the sale price. Busy Company realized a loss on ABC stock and a gain on DEF stock. The company would make the following journal entries to record realized gain and loss:

Account Titles

Debit

Credit

Cash (10 ABC shares x $8)

80

 

Realized loss on sale of trading securities

20

 

†††† Trading securities

 

100

Account Titles

Debit

Credit

Cash (5 DEF shares x $30)

150

 

†††† Realized gain on sale of available-for-sale securities

 

50

†††† Available-for-sale securities (5 shares x $20)

 

100

Realized loss on sale of trading securities and Realized gain on sale of available-for-sale securities represent income statement accounts (i.e., gain or loss is recorded in the income statement). These book gains or losses are reported in the ďOther revenues and expensesĒ section of the income statement. They can be used in evaluating management performance.

Not a member?
See why people join our
online accounting course: