Definition
The term marketable securities, available-for-sale is used to describe investments in debt and equity securities that a company does not intend to trade for profit or hold until maturity. In practice, marketable securities that are "available-for-sale" are those that are not classified as either "trading" or "held-to-maturity." Marketable securities are a subset of short-term investments; as such, they appear on the company's balance sheet and are classified as a current asset.
Explanation
Marketable securities are temporary investments one company might make in another, with the hope of providing higher returns to its shareholders. There are two basic types of these securities:
Marketable Equity Securities: common or preferred stock investments held by a company in another large corporation.
Marketable Debt Securities: short term bonds held by one company in another large corporation.
The accounting treatment of marketable securities depends on whether or not the company acquiring these investments intends to hold them until they mature, trade them, or make them available for sale.
GAAP requires adjustments to the balance sheet as the fair market value of securities categorized as "available-for-sale" change over time. It's important to note this change in value does not require an income statement adjustment. If the market price of a marketable security increases, the change in value is recorded as an unrealized gain, while a decrease in the fair market price is classified as an unrealized loss.
Example
On January 3rd, Company A purchased shares of common stock in Company XYZ for $100,000. This common stock is being held by Company A for investment purposes, as an alternative to placing cash in a bank account. The Company has classified these marketable securities as available-for-sale. The journal entry to record the purchase of these securities is as follows:
Debit | Credit | |
Marketable Securities: Available-for-Sale | $100,000 | |
Cash | $100,000 |
At yearend, the market value of this stock increased to $112,000. The journal entry to record this change in market value would be as follows:
Debit | Credit | |
Marketable Securities: Available-for-Sale | $12,000 | |
Unrealized Gain on Marketable Securities: Available-for-Sale | $12,000 |
Note: Unrealized Gain on Marketable Securities: Available-for-Sale is a balance sheet item.
In March, Company A decided to sell their shares of Company XYZ for $105,000. The journal entry to record this transaction would be:
Debit | Credit | |
Cash | $105,000 | |
Unrealized Gain on Marketable Securities: Available-for-Sale | $12,000 | |
Marketable Securities: Available-for-Sale | $112,000 | |
Gain on Sale of Marketable Securities: Available-for-Sale | $5,000 |
Related Terms
The financial accounting term marketable security is used to describe both debt and equity securities held by a company. Marketable securities is a subset of short term investments, as such it appears on the company's balance sheet as a current asset.
Moneyzine EditorFebruary 8th, 2024
The term marketable securities, held-to-maturity is used to describe investments in debt securities that a company intends, and is able, to hold for their full term.Moneyzine EditorFebruary 8th, 2024
The term marketable securities, trading is used to describe investments in debt and equity securities that a company intends to buy and sell for profit. Marketable securities, including common stocks and bonds purchased for the purpose of trading, are typically held for a period of less than three months.Moneyzine EditorFebruary 8th, 2024- The financial accounting term ownership interest is used to describe the degree to which one company has acquired common stock in another. Ownership interest generally falls into three categories: controlling, significant influence, and passive.Moneyzine EditorSeptember 20th, 2023
The term equity method refers to an accounting approach used when an investor has controlling interest or significant influence over another company. In practice, the equity method is used by companies that have a significant economic interest in another. This accounting method requires companies to periodically adjust their net assets as the value of this economic interest changes over time.Moneyzine EditorJanuary 17th, 2024.png)
The term cost method refers to an accounting approach used when an investor has passive interest in another company. In practice, the cost method is used when an investor (company) does not have a controlling interest or is unable to exert significant influence over the investee, but has made a long-term investment in that company.Moneyzine EditorJanuary 12th, 2024
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