Journal Entry

A customer has a margin deficiency in her margin account. She also holds fully paid, marginable securities in a separate cash account at the same firm. Can she cure the deficiency by having those securities moved into the margin account, rather than depositing new cash?

1. A.No -- only cash or newly purchased securities can be used to satisfy a margin deficiency; existing holdings in another account cannot be applied.Wrong. Existing fully paid marginable securities from another account at the same firm can be journaled in to add loan value.
2. B.Yes -- journaling the marginable securities from the cash account into the margin account adds loan value to the margin account and can cure the deficiency without any new cash being deposited.Correct. A journal transfer of marginable securities adds loan value directly and can cure a deficiency without a cash deposit.
3. C.Yes, but only if the securities are first sold in the cash account and the proceeds wired into the margin account as cash.Wrong. Selling the securities is unnecessary; the securities themselves can be journaled directly into the margin account.
4. D.No -- moving securities between a customer's own accounts at the same firm is treated as a prohibited transfer requiring outside approval.Wrong. Journaling securities between a customer's own accounts at the same firm is a routine, permitted operation.

Why: Loan value can be added to a margin account by depositing marginable securities, and those securities do not have to come from an outside source -- fully paid securities already sitting in the same customer's cash account at the same firm can simply be journaled over. The journal entry transfers the securities into the margin account, where they immediately carry loan value and can cure a deficiency, with no cash deposit and no sale required.

A firm processes an internal journal entry moving funds from one customer's account into a different, unrelated customer's account at the same firm, without any physical movement of cash. Separately, a journal entry moves funds between two accounts the SAME customer owns. How does the authorization required for these two journal entries differ?

1. A.Both require identical authorization, since a journal entry between any two accounts is treated as a routine bookkeeping matter regardless of ownership.Wrong. A journal entry between two unrelated customers' accounts is not treated identically to one within the same customer's own accounts.
2. B.Moving funds between two different, unrelated customers' accounts calls for heightened scrutiny and authorization, since it effectively transfers value from one customer to another without either customer's funds actually leaving the firm in a traceable way, unlike a journal entry between accounts the same customer owns, which raises materially less concern about value moving to someone else entirely.Correct. A journal entry between unrelated customers' accounts requires heightened scrutiny compared to one within the same customer's own accounts.
3. C.Moving funds between two accounts owned by the same customer requires the heightened authorization, while moving funds between two different customers' accounts requires none at all.Wrong. This reverses which journal entry requires the heightened authorization.
4. D.Neither journal entry requires any authorization beyond the entry itself, since journal entries by definition do not involve the actual movement of cash out of the firm.Wrong. A journal entry between unrelated customers' accounts requires heightened authorization, not none at all.

Why: Moving funds between two different, unrelated customers' accounts calls for heightened scrutiny and authorization, since it effectively transfers value from one customer to another without either customer's funds actually leaving the firm in a traceable way, unlike a journal entry between accounts the same customer owns, which raises materially less concern about value moving to someone else entirely.