Page 562 - Accounting Principles (A Business Perspective)

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Dec. 31 Unrealized loss on trading securities (-SE) 1,000
Trading securities (-A) 1,000
To record unrealized loss from market decline
of trading securities.
Note that the debit is to the Unrealized Loss on Trading Securities account. This loss is unrealized because the
securities have not been sold. However, the loss is reported in the income statement as a deduction in
arriving at net income. The credit in the preceding entry is to the Trading Securities account so as to adjust its
balance to its fair market value. (An unrealized holding gain would be an addition to net income.)
If Hanson sold investment C on 2011 January 1, the company would receive USD 5,000 (assuming no change in
market values from the previous day). The loss on the sale results from market changes in 2010 rather than in 2011;
the fair market value procedure placed that loss in the proper year. The entry for the sale is:

2011
Jan. 1 Cash (+A) 5,000
Trading securities- Company 5,000
C Stock (-A)
To record sale of Company C
Stock.
No adjustment needs to be made to the unrealized loss account previously debited because the unrealized loss
recorded in 2010 has flowed through the income statement and been closed to retained earnings through the
closing process.
Available-for-sale securities Assume a marketable equity security that management does not intend to sell
in the near term has a cost of USD 32,000 and a current market value on 2010 December 31, of USD 31,000. The
treatment of the loss depends on whether it results from a temporary decline in market value of the stock or a
permanent decline in the value. Assume first that the loss is related to a "temporary" decline in the market value of

the stock. The required entry is:
2010
Dec. 31 Unrealized loss on available-for-sale 1,000
securities (-SE)
Available-for-sale securities (-A) 1,000
To record unrealized loss from market
decline of available-for-sale securities.
These accounts would appear on the balance sheet as follows:
Hanson Company
Partial Balance Sheet
2010 December 31
Investments (or Current Assets)*:
Available-for-sale securities $31,000
Stockholders' equity:
Capital stock $xxx,xxx
Additional paid-in capital X,xxx
Total paid-in capital $xxx,xxx
Less: Unrealized loss on available-for-sale 1,000
securities
$xxx,xxx
Retained earnings Xx,xxx
Total stockholders' equity $xxx,xxx
*Depending on the length of time management intends to hold the securities.
Note that the unrealized loss for available-for-sale securities appears in the balance sheet as a separate negative

component of stockholders' equity rather than in the income statement (as it does for trading securities). An
unrealized gain would be shown as a separate positive component of stockholders' equity. An unrealized loss or
gain on available-for-sale securities is not included in the determination of net income because it is not expected to
be realized in the near future. These securities will probably not be sold soon.

Accounting Principles: A Business Perspective 563 A Global Text