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).
Let’s 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 |
Let’s 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.
Let’s 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 “Other revenues and expenses” section of the income statement. They can be used in evaluating management performance.