Perez Company began operations in 2009. Since then, it has reported the followin

Question

Perez Company began operations in 2009. Since then, it has reported the following gains and losses for its investments in trading securities on the income statement:

2009 2010 2011
Gains (losses) from sale of trading securities $ 15,000 $(20,000) $ 14,000
Unrealized holding losses on valuation of trading securities (25,000) — (30,000)
Unrealized holding gain on valuation of trading securities — 10,000 —

At January 1, 2012, Perez owned the following trading securities:
Cost
BKD Common (15,000 shares) $450,000
LRF Preferred (2,000 shares) 210,000
Drake Convertible bonds (100 bonds) 115,000

During 2012, the following events occurred:
1. Sold 5,000 shares of BKD for $170,000.
2. Acquired 1,000 shares of Horton Common for $40 per share. Brokerage commissions totaled $1,000.

At 12/31/12, the fair values for Perez's trading securities were:
BKD Common, $28 per share
LRF Preferred, $110 per share
Drake Bonds, $1,020 per bond
Horton Common, $42 per share

Instructions
(a) Prepare a schedule which shows the balance in the Securities Fair Value Adjustment (Trading) at December 31, 2011 (after the adjusting entry for 2011 is made).
(b) Prepare a schedule which shows the aggregate cost and fair values for Perez's trading securities portfolio at 12/31/12.
(c) Prepare the necessary adjusting entry based upon your analysis in (b) above.

Explanation / Answer

Seurities Fair Value Adjustment (Trading) Account Securities Fair Value Adjustment (Trading) + (Gain) - (Loss) 25,000 Ending Balance 12/31/2009 Adjusting entry on 12/31/2010 35,000 Ending Balance on 12/31/2010 10,000 40,000 Adjusting entry on 12/31/2011 30,000 Ending Balance 12/31/2011 Adjusting entry on 12/31/2012 8,000 22,000 Ending Balance 12/31/2012 Beginning Balance 01/01/2009 $0 Adjusting entry 12/31/2009 ($25,000) Credit Ending Balance 12/31/2009 ($25,000) Credit Balance Beginning Balance 01/01/2010 ($25,000) Credit Balance Adjusting entry 12/31/2010 $35,000 Debit Ending Balance 12/31/2010 $10,000 Dedit Balance Beginning Balance 01/01/2011 $10,000 Debit Balance Adjusting entry 12/31/2011 ($40,000) Credit Balance Ending Balance 12/31/2011 ($30,000) Credit Balance Beginning Balance 01/01/2012 ($30,000) Debit Balance Adjusting entry 12/31/2012 $8,000 Credit Balance Ending Balance 12/31/2012 ($22,000) Credit Balance Adjusting Entery at the end of the year December 31, 2011 Unrealized Holding Gain or Loss- Income 40,000 Securities Fair Value Adjustment (Trading) 40,000 Adjusting entry to bring Trading Securities to Fair Value. B) Perez Company Trading Equity Security Portfolio December 31, 2011 Investments Cost Fair Value Unrealized Gain (Loss) BKD Common (10,000 shares) $300,000 $280,000 ($20,000) LRF Preferred (2,000 shares) 210,000 220,000 10,000 Drake Convertible Bonds (100 Bonds) 115,000 102,000 ($13,000) Horton Common (1,000 shares) 41,000 42,000 1,000 Total of the Portfolio $666,000 $644,000 ($22,000) C) December 31, 2011 Securities Fair Value Adjustment (Trading) 8,000 Unrealized Holding Gain or Loss- Income 8,000 Adjusting entry to bring trading securities to Fair Value. Previous Securities Fair Value Adjustment Balance (Credit Balance) ($30,000) Securities Fair Value Adjustment- Dedit $8,000 Ending Balance 12/31/2011 ($22,000) Credit Balance

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