Chapter 13, Problem 12P

1.

To determine

Prepare the journal entries in the books of Company D for the year 2016.

Explanation of Solution

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

Prepare the journal entries in the books of Company D for the year 2016.

Date	Account Title and Explanation	Debit	Credit
February 3, 2016	Investment in Available-for-sale Securities	$36,000
	Cash $\left(300\times \$12\right)$		$36,000
	(To record the purchase of Company B's 3000 shares)
April 1, 2016	Investment in Available-for-sale Securities	$20,000
	Interest income (1)	$600
	Cash		$20,600
	(To record the purchase of Incorporation S's bonds)
June 30, 2016	Cash	$1,950
	Dividend income $\left(3,000\times \$0.25\right)$		$750
	Interest income (2)		$1,200
	(To record the interest and dividend received)
September 1, 2016	Investment in Available-for-sale Securities	$88,000
	Cash $\left(4,000\times \$22\right)$		$88,000
	(To record the purchase of Company W's 4000 shares)
November 1, 2016	Investment in Available-for-sale Securities	$30,000
	Interest income (3)	$1,375
	Cash		$31,375
	(To record the purchase of Incorporation W's bonds)
December 1, 2016	Cash	$1,650
	Interest income (4)		$1,650
	(To record the interest received from Company E's bond)
December 1, 2016	Cash	$30,300
	Investment in Available-for-sale Securities		$30,000
	Gain on sale of Available-for-sale Securities $\left(\$30,300-\$30,000\right)$		$300
	(To record the sale of Company E's bond on profit)
December 30, 2016	Cash	$750
	Dividend income $\left(3,000\times \$0.25\right)$		$750
	(To record the dividend received for Company B's share)
December 30, 2016	Cash	$35,300
	Loss on sale of Available-for-sale Securities $\left(\$30,300-\$36,000\right)$	$700
	Investment in Available-for-sale Securities		$36,000
	(To record the sale of Company B's share on loss)
December 31, 2016	Cash	$1,200
	Interest income (5)		$1,200
	(To record the interest received from Incorporation S's bond)
December 31, 2016	Allowance for change in fair value of investment	$4,200
	Unrealized holding gain/loss: Available-for-sale securities (7)		$4,200
	(To adjust the allowance and the unrealized gain on holding the Securities)

Table (1)

Working note (1):

Determine the amount of interest income paid by Company D.

$\begin{array}{c}\text{Interest income = }\left(\begin{array}{l}\text{Face value of bond}\times \text{Interest rate}\\ \times \frac{\text{Number of months accrued}}{12\text{months}}\end{array}\right)\\ =\$20,000\times 12\%\times \frac{3}{12}\\ =\$600\end{array}$

Working note (2):

Calculate the amount of interest income received from Incorporation S’s bond.

$\begin{array}{c}\text{Interest income = Face value of bond }\times \text{Stated interest rate }\times \frac{6\text{months}}{\text{12months}}\\ =\$20,000\times 12\%\times \frac{6}{12}\\ =\$1,200\end{array}$

Working note (3):

Calculate the amount of interest income paid by Company D.

$\begin{array}{c}\text{Interest income = Face value of bond}\times \text{Interest rate }\times \frac{\text{Number of months accrued}}{12\text{months}}\\ =\$30,000\times 11\%\times \frac{5}{12}\\ =\$1,375\end{array}$

Working note (4):

Calculate the amount of interest income received from Company E’s bond.

$\begin{array}{c}\text{Interest income = Face value of bond }\times \text{Stated interest rate }\times \frac{6\text{months}}{\text{12months}}\\ =\$30,000\times 11\%\times \frac{6}{12}\\ =\$1,650\end{array}$

Working note (5):

Calculate the amount of interest income.

$\begin{array}{c}\text{Interest income = Face value of bond }\times \text{Stated interest rate }\times \frac{6\text{months}}{\text{12months}}\\ =\$20,000\times 12\%\times \frac{6}{12}\\ =\$1,200\end{array}$

Working note (6):

Determine the fair value of investment in Corporation W’s stock.

$\begin{array}{c}\text{Fair value of Corporation W's shares}=\left[\begin{array}{l}\text{Number of shares held }\times \\ \text{Market value as on December 31}\end{array}\right]\\ \text{=4,000shares }\times \$23\\ =\$92,000\end{array}$

Working note (7):

Determine the net amount of unrealized gain or loss on available-for-sale securities as on December 31, 2016.

Table (2)

2.

To determine

Show the items of income or loss of Company D for the year ended December 31, 2016.

Explanation of Solution

Show the items of income or loss of Company D for the year ended December 31, 2016.

Particulars	Amount
Interest income (8)	$2,075
Dividend income (9)	$1,500
Loss on sale of available-for-sale securities	($ 700)
Gain on sale of available-for-sale securities	$300

Table (3)

Working note (8):

Calculate the amount of interest income.

$\begin{array}{c}\text{Interest income earned}\}\text{=}\left[\begin{array}{l}\text{Interest income paid to Incorporation Son April 1+}\\ \text{Interest income earned from Incorporation S's}\\ \text{bond on June 30+ Interest income paid to Company E}\\ \text{on November 1+Interest income earned from}\\ \text{Company E on November 1+Interest income earned}\\ \text{from Incorporation S's bond onDecember 31}\end{array}\right]\\ =-\$600+\$1,200-\$1,375+\$1,650+\$1,200\\ =\$2,075\end{array}$

Working note (9):

Calculate the amount of dividend income.

$\begin{array}{c}\text{Dividend income = }\left[\begin{array}{l}\text{Dividend received from Company B during June 30+}\\ \text{Dividend received from Company B during December 30}\end{array}\right]\\ =\$750+\$750\\ =\$1,500\end{array}$

3.

To determine

Show the carrying value of Company D’s investment in available-for-sale securities at its balance sheet at December 31, 2016.

Explanation of Solution

Show the carrying value of Company D’s investment in available-for-sale securities at its balance sheet at December 31, 2016.

Company D
Balance sheet Statement (Partial)
As at December 31, 2016
Assets	Amount
Current assets:
Investment in available-for-sale securities (at cost)	$108,000
Add : Allowance for change in fair value of investment	$4,200
Investment in available-for-sale securities (at fair value)	$112,200

Table (4)