Journal Entry for Unrealized Gain
Unrealized gain is the increase of securities value while the company has not yet sold them.
When an investor purchase security, such as a stock, at one price and then sells it at a higher price, they have realized a gain. Similarly, when an investor purchases security at one price and then sells it at a lower price, they have realized a loss.
An unrealized gain or loss occurs when the current market price of the security is different from the original purchase price, but the security has not yet been sold.
For example, if an investor purchased shares of ABC Corporation for $10 per share and the current market price is $12 per share, the investor has an unrealized gain of $2 per share. If the market price of the security subsequently declines to $9 per share, the investor would have an unrealized loss of $1 per share. Unrealized gains and losses can be either positive or negative and are dependent on changes in market conditions.
The fair value of security investment is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value measurement is a market-based measurement that should reflect the assumptions market participants would use when pricing the asset or liability, assuming they are knowledgeable, rational, and acting in their own best interests.
The security’s fair value depends on the market price in the capital market. The stock price will depend on the capital market because this is where the company will get most of its funding.
A company’s stock price is determined by a number of factors, but the most important factor is the company’s financial performance. If a company is doing well, its stock price will increase. If a company is struggling, its stock price will decrease. In general, investors are looking for companies that are growing rapidly and profitable.
Journal Entry for Unrealized Gain
The company records investment when purchasing the security investment. It is classified as the assets on balance sheet.
The journal entry is debiting security investment and credit cash.
| Account | Debit | Credit |
|---|---|---|
| Security Investment | 000 | |
| Cash | 000 |
At the end of the year, the company needs to prepare an annual financial statement. The security investment will be present on the balance sheet, its value will change depending on the price in the capital market. If the market price is higher than the purchased price, it will create an unrealized gain and increase of security investment.
The journal entry is debiting security investment and credit unrealized gain.
| Account | Debit | Credit |
|---|---|---|
| Security Investment | 000 | |
| Unrealized Gain | 000 |
The security investment will increase to reflect the current market value. The increased amount is recorded as the unrealized gain which reports under the other comprehensive income.
Example
Company ABC has purchased Tesla’s common stock from the capital market. It purchases 1,000 shares at $ 200 per share. At the end of the year, the Tesla share price increased to $ 250 per share, but ABC still keep the shares. Please prepare a journal entry for unrealized gain.
The company has invested in the security which is the common stock. It has to record this investment on the balance sheet.
The journal entry is debiting security investment $ 200,000 and credit cash $ 200,000.
| Account | Debit | Credit |
|---|---|---|
| Security Investment | 200,000 | |
| Cash | 200,000 |
At the end of the year, Tesla share price increased to $ 250, ABC has to reflect this new value on the balance sheet.
Gain per share = $ 250 – $ 200 = $ 50 per share
ABC has a total unrealized gain of $ 50,000. This gain must be included in the report to increase the investment account.
The journal entry is debiting security investment $ 50,000 and credit unrealized gain $ 50,000.
| Account | Debit | Credit |
|---|---|---|
| Security Investment | 50,000 | |
| Unrealized Gain | 50,000 |