Sale of marketable securities

The sale of marketable securities often results in a gain or a loss depending on their market value at the time of sale. The accounting treatment for the sale of securities under both the situations are discussed below:

Sale of marketable securities at a gain:

If marketable securities are sold for a price that is higher than their cost, the difference represents a gain on sale of marketable securities. When securities are sold at a gain, cash account is debited, marketable securities account and gain on sale of investment account are credited.

Journal entry is given below:

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Example 1

Fast company purchases 5,000 shares of Eastern company at a cost of $45.52 per share on December 1, 2015 for the purpose of short term investment. It sells 1,000 shares on December 20, 2015 at the rate of $46 per share and pays a $25 brokerage commission.

Required: Prepare a journal entry to record the sale of 1,000 shares by Fine company.

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*Gain: [(1,000 shares × $46) – $25] – (1,000 shares × $45.52) = 455

Sale of marketable securities at a loss:

If marketable securities are sold at a price that is lower than their cost, the difference represents a loss on sale of  marketable securities. When securities are sold at a loss, cash account and loss on sale of investment account are debited and marketable securities account is credited.

Journal entry is given below:

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Example 2

Refer to the example 1 and suppose the Fast company sells an additional 2,000 shares of Eastern company on December 26 at a rate of $44.50 per share and pays a $35 brokerage commission.

Required: Prepare a journal entry to record the sale of 2,000 shares by Fast company.

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*Loss: (2,000 shares × $45.52) – [(2,000 shares × $44.50) – $35] = $2,075

The gains and losses on sale of securities are reported in the income statement. The gain of $455 and the loss of $2,075 on the sale of shares of Eastern company will appear on the income statement of Fast company in the “other income/expenses section”.

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