Page 561 - Accounting Principles (A Business Perspective)

14. Stock investments

When collecting the dividend on 2011 January 15, Brewer debits Cash and credits Dividends Receivable:
2011
Jan. 15 Cash (+A) 1,000
Dividends receivable (-A) 1,000
To record the receipt of a cash
dividend on Cowen common
stock.
Stock dividends and stock splits As discussed in Chapter 13, a company might declare a stock dividend
rather than a cash dividend. An investor does not recognize revenue on receipt of the additional shares from a stock

dividend. The investor merely records the number of additional shares received and reduces the cost per share for
each share held. For example, if Cowen distributed a 10 per cent stock dividend in February 2011, Brewer, which
held 1,000 shares at a cost of USD 14,400 (or USD 14.40 per share), would receive another 100 shares and would
then hold 1,100 shares at a cost per share of USD 13.09 (computed as USD 14,400/1,100 shares). Similarly, when a
corporation declares a stock split, the investor would note the shares received and the reduction in the cost per
share.
FASB Statement No. 115 (1993) governs the subsequent valuation of marketable equity securities accounted for

under the fair market value method. Marketable refers to the fact that the stocks are readily saleable; equity
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securities are common and preferred stocks. The Statement also addresses the subsequent valuation of debt
securities. FASB Statement No. 159 (2007) amends FASB Statement No. 115 and gives a fair value alternative that
allows companies to elect to measure certain items at fair value at a specified date. The subsequent valuation of
debt securities will be addressed in intermediate accounting classes.
CompanyNo. of Cost per Market Price Total Total Increase/
shares Share per share cost market (decrease)
2010/12/31 2007/12/31 in market value
A 200 $35 $40 $ 7,000 $ 8,000 $ 1,000
B 400 10 15 4,000 6,000 2,000
C 100 90 50 9,000 5,000 (4,000)
$20,000 $19,000 $ (1,000)
Exhibit 107: Stock portfolio of Hanson company
The FASB Statement requires that at year-end, companies adjust the carrying value of each of their two

portfolios (trading securities and available-for-sale securities) to their fair market value. Fair market value is
considered to be the market price of the securities or what a buyer or seller would pay to exchange the securities. An
unrealized holding gain or loss will usually result in each portfolio.
Trading securities To illustrate the application of the fair market value to trading securities, assume that
Hanson Company has the securities shown in Exhibit 107 in its trading securities portfolio. Applying the fair
market value method reveals that the total fair market value of the trading securities portfolio is USD 1,000 less
than its cost. The journal entry required at the end of 2010 is:
2010

46 FASB, Statement of Financial Accounting Standards No. 115, "Accounting for Certain Marketable Securities"
(Stamford, Conn., 1993). Copyright © by the Financial Accounting Standards Board, Stamford, Connecticut
06856, U.S.A. Quoted (or excerpted) with permission. Copies of the complete document are available from the
FASB.
47. FASB, Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (Norwalk, Conn., 2007). Copyright © by the Financial Accounting Standards Board,

Norwalk, Connecticut 06856, U.S.A.

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