Example: Adjust trading securities investments to fair value

Let's say that a company called United has invested in debt securities (Masterwear bonds) and they are classified as trading securities. The book value of the investment (i.e., the face value of the bonds less their amortized discount) is $671,297. The fair value of the bonds is $714,943. How much of an adjustment is necessary to mark the bonds to market?

We need to increase the value of Masterwear's investment in the balance sheet. How do we accomplish this? We create a new investment account called "Fair value adjustment" - this account accompanies the trading security investment account in the balance sheet in a manner similar to the way accumulated depreciation accompanies a fixed asset account. We record the following journal entry.

Sale of trading security investments

How do we record the sale of a trading security? We follow a two step process: Step 1 updates the investment to fair value on the date of sale (i.e., we record an entry like the one above, but on the date of sale) and Step 2 removes the investment and fair value adjustment accounts from the balance sheet, records the cash proceeds, and record any gain or loss. 

Let's continue with the example above. Assume United sells its investment in Masterwear bonds for $725,000.

Step 1: Adjust trading securities to fair value.

Step 2: Record the sale transaction.

Financial statement presentation