Explanation Trading securities (TS): The category of passive investments which are bought with a purpose to sell in the near future are referred to as trading securities. The percentage of passive investments in debt or equity will be less than 20%. Journal entry : Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically. Debit and credit rules: Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts. Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts. Prepare journal entry for purchase of investment in TS . Date Account Titles and Explanation Post Ref. Debit ($) Credit ($) 2016 June 30 Investments in TS 105,000 Cash 105,000 (To record purchase of investment in TS) Table (1) Description: Investments in TS is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited. Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited. Working Notes: Compute cost of investment in TS. Cost of investment = Number of shares × Price per share = 7 , 00 0 shares × $15 per share = $ 105 , 000 (1) Prepare journal entry for adjusting the cost of TS to the fair market value, as on December 31, 2016 . Date Account Titles and Explanation Post Ref. Debit ($) Credit ($) 2016 December 31 Investments in TS 14,000 Net Unrealized Gains (Losses) 14,000 (To record the adjustment of cost of investment in TS to the fair value) Table (2) Description: Investments in TS is an asset account. The account is debited because the market price was increased, and eventually the asset value increased. Net Unrealized Gains (Losses) is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, an increase in stockholders’ equity value is credited. This gain is reported as gain under net income. Working Notes: Determine the unrealized gain or loss on investment on December 31, 2016. Step 1: Compute the fair value of investment on December 31, 2016. Fair value = Number of shares×Market price per share = 7,000 shares × $17 per share = $119,000 (2) Step 2: Compute unrealized gain or loss on investment in AFS securities. Unrealized gain or ( loss ) } = { Fair value of investment on December 31, 2016 – Cost of investment on June 30, 2016 } =$119,000–$105,000 =$14,000 Note: Refer to Equations (2) and (1) for both the values. Prepare journal entry for adjusting the cost of TS securities to the fair market value, as on December 31, 2017 . Date Account Titles and Explanation Post Ref. Debit ($) Credit ($) 2017 December 31 Net Unrealized Gains (Losses) 21,000 Investments in TS 21,000 (To record the adjustment of cost of investment in TS to the fair value) Table (3) Description: Net Unrealized Gains (Losses) is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, a decrease in stockholders’ equity value is debited. This loss is reported as loss under net income. Investments in TS is an asset account. The account is credited because the market price was decreased, and eventually the asset value decreased. Working Notes: Determine the unrealized gain or loss on investment in TS. Step 1: Compute the fair value of investment on December 31, 2017. Fair value = Number of shares×Market price per share = 7,000 shares × $14 per share = $98,000 (3) Step 2: Compute unrealized gain or loss on investment in TS