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.

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

(a) To determine the balance in the Securities Fair Value Adjustment (Trading) at December 31, 2011, we need to consider the unrealized holding losses on the valuation of trading securities reported in the income statement for the years 2009, 2010, and 2011.

Calculations:
Unrealized holding losses on valuation of trading securities in 2009: $25,000
Unrealized holding losses on valuation of trading securities in 2011: $30,000

To calculate the balance in the Securities Fair Value Adjustment (Trading) at December 31, 2011, we subtract the unrealized holding losses from the previous year from the unrealized holding losses in the current year:

Balance in Securities Fair Value Adjustment (Trading) at December 31, 2011 = Unrealized holding losses in 2011 - Unrealized holding losses in 2009
= $30,000 - $25,000
= $5,000

Therefore, the balance in the Securities Fair Value Adjustment (Trading) at December 31, 2011 was $5,000.

(b) To prepare the schedule showing the aggregate cost and fair values for Perez's trading securities portfolio at December 31, 2012, we need to consider the cost and fair values of each security.

Calculations:

1. BKD Common:
- Cost: 15,000 shares x $30 per share = $450,000
- Fair Value: 15,000 shares x $28 per share = $420,000

2. LRF Preferred:
- Cost: 2,000 shares x $105 per share = $210,000
- Fair Value: 2,000 shares x $110 per share = $220,000

3. Drake Convertible bonds:
- Cost: 100 bonds x $1,150 per bond = $115,000
- Fair Value: 100 bonds x $1,020 per bond = $102,000

4. Horton Common:
- Cost: 1,000 shares x $40 per share = $40,000 (including brokerage commissions)

Therefore, the aggregate cost and fair values for Perez's trading securities portfolio at December 31, 2012, are as follows:

Cost Fair Value
BKD Common $450,000 $420,000
LRF Preferred $210,000 $220,000
Drake Bonds $115,000 $102,000
Horton Common $40,000 $42,000

(c) Based on the analysis in the previous step, we can calculate the necessary adjusting entry to record the change in fair value of the trading securities portfolio at December 31, 2012.

Calculations:

BKD Common:
Adjusting entry = Fair Value - Cost
= $420,000 - $450,000
= -$30,000 (Loss, since fair value is less than cost)

LRF Preferred:
Adjusting entry = Fair Value - Cost
= $220,000 - $210,000
= $10,000 (Gain, since fair value is greater than cost)

Drake Bonds:
Adjusting entry = Fair Value - Cost
= $102,000 - $115,000
= -$13,000 (Loss, since fair value is less than cost)

Horton Common:
Adjusting entry = Fair Value - Cost
= $42,000 - $40,000
= $2,000 (Gain, since fair value is greater than cost)

Based on the calculations above, the necessary adjusting entry at December 31, 2012, would be as follows:

Debit: Securities Fair Value Adjustment (Trading) $19,000
Credit: Unrealized Gain on Trading Securities $12,000
Credit: Unrealized Loss on Trading Securities $7,000

(a) To prepare the schedule for the balance in the Securities Fair Value Adjustment (Trading) at December 31, 2011, we need to calculate the fair value adjustment for each trading security.

The fair value adjustment for each trading security can be calculated by taking the fair value at December 31, 2011, minus the cost.

For BKD Common:
Fair value at 12/31/2011 = $28 per share
Cost = $450,000 / 15,000 shares = $30 per share
Fair value adjustment = Fair value - Cost = $28 - $30 = -$2 per share

Fair value adjustment for BKD Common = -$2 per share x 15,000 shares = -$30,000

For LRF Preferred:
Fair value at 12/31/2011 = $110 per share
Cost = $210,000 / 2,000 shares = $105 per share
Fair value adjustment = Fair value - Cost = $110 - $105 = $5 per share

Fair value adjustment for LRF Preferred = $5 per share x 2,000 shares = $10,000

For Drake Convertible bonds:
Fair value at 12/31/2011 = $1,020 per bond
Cost = $115,000 / 100 bonds = $1,150 per bond
Fair value adjustment = Fair value - Cost = $1,020 - $1,150 = -$130 per bond

Fair value adjustment for Drake Convertible bonds = -$130 per bond x 100 bonds = -$13,000

Therefore, the balance in the Securities Fair Value Adjustment (Trading) at December 31, 2011, is:
BKD Common: -$30,000
LRF Preferred: $10,000
Drake Convertible bonds: -$13,000

(b) To prepare the schedule for the aggregate cost and fair values for Perez's trading securities portfolio at 12/31/2012, we need to calculate the cost and fair value for each trading security.

For BKD Common:
Cost = $450,000
Fair value = $28 per share x 15,000 shares = $420,000

For LRF Preferred:
Cost = $210,000
Fair value = $110 per share x 2,000 shares = $220,000

For Drake Convertible bonds:
Cost = $115,000
Fair value = $1,020 per bond x 100 bonds = $102,000

For Horton Common:
Cost = 1,000 shares x $40 per share + $1,000 brokerage commissions = $41,000
Fair value = $42 per share x 1,000 shares = $42,000

Therefore, the aggregate cost and fair values for Perez's trading securities portfolio at 12/31/2012 are:
Cost: $450,000 + $210,000 + $115,000 + $41,000 = $816,000
Fair value: $420,000 + $220,000 + $102,000 + $42,000 = $784,000

(c) To prepare the necessary adjusting entry based on the analysis in (b) above, we need to calculate the unrealized holding gain or loss for each trading security.

For BKD Common:
Unrealized holding gain or loss = Fair value - Cost = $420,000 - $450,000 = -$30,000 (loss)

For LRF Preferred:
Unrealized holding gain or loss = Fair value - Cost = $220,000 - $210,000 = $10,000 (gain)

For Drake Convertible bonds:
Unrealized holding gain or loss = Fair value - Cost = $102,000 - $115,000 = -$13,000 (loss)

For Horton Common:
Unrealized holding gain or loss = Fair value - Cost = $42,000 - $41,000 = $1,000 (gain)

To record the adjusting entry, we debit or credit the Securities Fair Value Adjustment (Trading) account with the total unrealized holding gain or loss.

Debit (loss):
Securities Fair Value Adjustment (Trading) = -$30,000 + -$13,000 = -$43,000

Credit (gain):
Securities Fair Value Adjustment (Trading) = $10,000 + $1,000 = $11,000

Therefore, the adjusting entry is:
Debit Securities Fair Value Adjustment (Trading) $43,000
Credit Securities Fair Value Adjustment (Trading) $11,000