Wize University Introduction to Financial Accounting Textbook > Investments
Fair Value Through Profit or Loss
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Fair Value Through Profit or Loss
This method of accounting for non-strategic investments requires periodic adjustments in the value of the investment to reflect the fair value (market value). This method is commonly used for investments that are marked for trading.
Trading Investments
- Investments held for a short-period of time
- Intention is to trade the investments frequently
Recording the Acquisition
- Recorded as Trading Investments
- Includes all costs related to acquisition
- Example: Price of shares, brokerage fees, commissions
Recording Dividends
- Recorded as revenue
- No adjustments are needed for timing because dividends do not accrue like interest.
Recording Adjustment to Fair Value
- Value of asset adjusted to fair value
- Record change as unrealized gain or loss
Recording Sale
- Record net proceeds from sale
- Sale price less any selling expenses like brokerage fees and commissions
- Recognize realized gain or loss
- Difference between proceeds from sale and carrying value
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Example: Fair Value Through Profit or Loss
During the year ended December 31, 2020, Humaniti Inc. had the following transactions for its trading investments:
Jan 9 Purchased 4,000 $2-preferred shares of Roccabella Corporation for $300,000.
Apr 1 Received the quarterly dividend
Jun 1 Received the quarterly dividend
Jul 8 Sold 2,000 shares for $180,000
Jul 31 The shares were trading at $120 per share.
Aug 31 Sold 1,000 shares for $140 per share.
Record the transactions using the fair value through profit or loss method.
Jan 9 Purchased 4,000 $2 preferred shares of Roccabella Corporation for $300,000.
Apr 1 Received the quarterly dividend
Jun 1 Received the quarterly dividend
Jul 8 Sold 2,000 shares for $180,000
Jul 31 The shares were trading at $120 per share.
Aug 31 Sold 1,000 shares for $140 per share.
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Example: Fair Value Through Profit and Loss
Karla Inc. had the following three securities in its trading portfolio on December 31st, 2019:
Prepare the adjusting entry at December 31st, 2019 to report the portfolio at its fair value.
Practice: Fair Value Through Profit or Loss
On February 17th Apple Inc. purchased 5,000 common shares of Microsoft Corp. for $1,000,000, these shares were marked for trading. On April 12th, Apple received a $40,000 cash dividend from Microsoft. On June 30th, Microsoft was trading at $280 per share and on August 19th, Apple Inc. sold 3,000 shares of Microsoft for $816,000.
Prepare the journal entries to record
The purchase of shares on February 17th
Transactions:
| Account | Debit | Credit |
|---|---|---|
Practice: Fair Value Through Profit or Loss
XYZ Inc. had the following three securities in its trading portfolio on December 31st, 2021:
Prepare the adjusting entry at December 31st, 2021 to report the portfolio at its fair value.
Transactions:
| Account | Debit | Credit |
|---|---|---|