Sale of marketable securities

By: Rashid Javed | Updated on: October 23rd, 2021

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.

The journal entry for the sale of marketable securities at a gain 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

A D V E R T I S E M E N T

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.

The journal entry for the sale of marketable securities at a loss 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”.

impact on statement of cash flows:

The cash inflow resulting from sale of marketable securities is classified as investing cash flow and is reported under investing activities section of statement of cash flows. The total cash inflow in example 1 and example 2 is $134,940 (= $45,975 + $88,965) which will be reported as investing cash inflow in statement of cash flows of Fine Company.

A D V E R T I S E M E N T

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