Chapter 12 Special Income and Investment Reporting Issues 545they continue to be classified as temporary, provided they meet two conditions. First,
the securities are readily marketable and can be sold for cash at any time. Second, man-
agement intends to sell the securities when the business needs cash for operations.
Temporary investments in available-for-sale securities are recorded in a current as-
set account, Marketable Securities, at their cost. This cost includes all amounts spent to
acquire the securities, such as broker’s commissions. Any dividends received on the
investment are recorded as a debit to Cashand a credit to Dividend Revenue.^10
To illustrate, assume that on June 1 Crabtree Co. purchased 2,000 shares of Inis
Corporation common stock at $89.75 per share plus a brokerage fee of $500. On October
1, Inis declared a $0.90 per share cash dividend payable on November 30. Crabtree’s
entries to record the stock purchase and the receipt of the dividend are as follows:On the balance sheet, temporary investments are reported at their fair market
value. Market values are normally available from stock quotations in financial news-
papers, such as The Wall Street Journal. Any difference between the fair market values
of the securities and their cost is an unrealized holding gain or loss. This gain or loss
is termed “unrealized” because a transaction (the sale of the securities) is necessary be-
fore a gain or loss becomes real (realized).
To illustrate, assume that Crabtree Co.’s portfolio of temporary investments was
purchased during 2007 and has the following fair market values and unrealized gains
and losses on December 31, 2007:Unrealized
Common Stock Cost Market Gain (Loss)
Edwards Inc. $150,000 $190,000 $ 40,000
SWS Corp. 200,000 200,000 —
Inis Corporation 180,000 210,000 30,000
Bass Co. 160,000 150,000 (10,000)
Total $690,000 $750,000 $ 60,000If income taxes of $18,000 are allocated to the unrealized gain, Crabtree’s tempo-
rary investments should be reported at their total cost of $690,000, plus the unrealized
gain (net of applicable income tax) of $42,000 ($60,000 $18,000), as shown in Exhibit 3.
The unrealized gain (net of applicable taxes) of $42,000 should also be reported as
another comprehensive income item, as we mentioned in the preceding chapter. For ex-
ample, assume that Crabtree Co. has net income of $720,000 for the year ended
December 31, 2007. Crabtree elects to report comprehensive income in the statement of
comprehensive income, as shown in Exhibit 4. In addition, the accumulated other com-
prehensive income on the balance sheet would also be $42,000, representing the be-
ginning balance of zero plus other comprehensive income of $42,000, as shown in
Exhibit 3.June 1 Marketable Securities 180,000
Cash 180,000
Purchased 2,000 shares of Inis Corporation
common stock [($89.75 2,000 shares) + $500].
Nov. 30 Cash 1,800
Dividend Revenue 1,800
Received dividend on Inis Corporation common
stock (2,000 shares $0.90).10 Stock dividends received on an investment are not journalized, since they have no effect on the
investor’s assets and revenues.SCF BS IS
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