Chapter 12, Problem 12.6P

a)

To determine

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.

Equity investments: The financial instruments which claim ownership in the issuing company and pay a dividend revenue to the investor company, are referred to as equity securities. The investments in equity securities are referred to as equity investments.

Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

To Journalize: The transactions of Company ASF for the year 2016.

Explanation of Solution

Purchased the bonds of Company FF on December 12, 2016:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.12.16	Investment in  bonds of Company FF	$12,000,000
	Cash		$12,000,000
	(To record the investment made in Company FF)

Table (1)

• Investment in Bonds is an asset account. Since bonds 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.

Purchased the shares of Company FI on December 13, 2016:

Prepare the journal entry to record the investment made in Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.13.16	Investment in  shares of Company FI	$22,000,000
	Cash		$22,000,000
	(To record the investment made in Company FI)

Table (2)

• Investment in Company FI Shares 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.

Sold the bonds of Company FF on December 15, 2016:

1. i. Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.16	Fair value adjustment (1)	$100,000
	Unrealized holding gain—NI		$100,000
	(To record the gain on adjustment)

Table (3)

• Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 15, 2016.
• Unrealized Holding Gain–NI 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, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2016, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 12, 2016	12,000,000
Adjustment needed to update fair value (Balancing figure) (1)	100,000
Fair value adjustment balance needed on December 15, 2016	12,100,000

Table (4) (1)

1. ii. Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.16	Cash	$12,100,000
	Investment in  bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (5)

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
• Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the Treasury Bonds and Bills on December 22, 2016:

Prepare the journal entry to record the investment made in Treasury Bills and Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.22.16	Investment in Treasury Bills	$56,000,000
	Investment in Treasury Bonds	$65,000,000
	Cash		$121,000,000
	(To record the investment made )

 Table (6)

• Investments is being made, this increases the assets; hence debit the investment.
• Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the half of the shares of Company FI on December 23, 2016:

1. i. Prepare the journal entry to record the loss from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.16	Unrealized holding loss—NI	$1,000,000
	Fair value adjustment  (2)		$1,000,000
	(To record the loss through adjustment)

Table (7)

• Unrealized Holding Loss–NI 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, stockholders’ equity value is debited.
• Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2016.

Working Notes:

Compute the unrealized loss as on December 15, 2016, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2016	11,000,000
Adjustment needed to update fair value (Balancing figure) (2)	1,000,000
Fair value adjustment balance needed on December 23, 2016	10,100,000

Table (8) (2)

1. ii. Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.16	Cash	$10,000,000
	Fair value adjustment	$1,000,000
	Investment in  bonds of Company FI		$11,000,000
	(To record the sale of investment)

 Table (9)

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
• Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bills on December 26, 2016:

1. i. Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.16	Fair value adjustment (3)	$1,000,000
	Unrealized holding gain—NI		$1,000,000
	(To record the gain on adjustment)

Table (10)

• Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 26, 2016.
• Unrealized Holding Gain–NI 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, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2016, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2016	56,000,000
Adjustment needed to update fair value (Balancing figure) (3)	1,000,000
Fair value adjustment balance needed on December 16, 2016	57,000,000

Table (11) (3)

1. ii. Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.16	Cash	$57,000,000
	Investment in  Treasury Bills		$56,000,000
	Fair value adjustment		$1,000,000
	(To record the sale of Treasury Bills)

Table (12)

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
• Investment in Treasury Bills is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bonds on December 27, 2016:

1. i. Prepare the journal entry to record the loss from the Treasury Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.27.16	Unrealized holding loss—NI	$2,000,000
	Fair value adjustment   (4)		$2,000,000
	(To record the loss through adjustment)

Table (13)

Explanation:

• Unrealized Holding Loss–NI 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, stockholders’ equity value is debited.
• Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2016.

Working Notes:

Compute the unrealized gain as on December 15, 2016, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2016	65,000,000
Adjustment needed to update fair value (Balancing figure) (4)	2,000,000
Fair value adjustment balance needed on December 27, 2016	63,000,000

Table (14) (4)

1. ii. Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.27.16	Cash	$63,000,000
	Fair value adjustment	$2,000,000
	Investment in  Treasury Bonds		$65,000,000
	(To record the sale of Treasury Bonds)

 Table (15)

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
• Investment in Treasury Bonds is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Record the dividends received from the shares of Company FI on December 28, 2016:

Prepare the journal entry to record the dividends received from Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.28.16	Cash	$200,000
	Dividend Revenue		$200,000
	(To record the dividends received from the shares of Company FI)

Table (16)

• Investments is being made, this increases the assets; hence debit the investment.
• Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Record the adjusting entry for the shares of Company FI on December 31, 2016:

Prepare the adjusting entry to record the fall in the price of shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.31.16	Unrealized holding loss—NI   (5)	$1,000,000
	Fair value adjustment		$1,000,000
	(To record the loss through adjustment)

Table (17)

 :

• Unrealized Holding Loss–NI 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, stockholders’ equity value is debited.
• Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2016.

Working Notes:

Compute the unrealized holding loss.

$\begin{array}{c}\text{Unrealized holding loss = }\left(\begin{array}{l}\text{Number of shares }\times \\ \text{ Cost per share}\end{array}\right)-\text{Cost price of shares}\\ \text{=}\left(1,000,000\times \$10\right)-\left(\$22,000,000\times \frac{1}{2}\right)\\ =\$10,000,000-\$11,000,000\\ =(-)\$1,000,000\end{array}$ (5)

Record the closing entry for the shares of Company FI on December 31, 2016:

Prepare the adjusting entry to record the closing entries of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.31.16	Income Summary	$700,000
	Investment revenue   (6)	$5,200,000
	Gain on sale of investments  (7)	$9,100,000
	Loss on sale of investments   (8)		$14,000,000
	Net unrealized holding gains and losses—I/S   (5)		$1,000,000
	(To record the loss through adjustment)

Table (17)

• Income Summary has been debited to close the income summary account.
• Investment revenue is a revenue account. In order to close the investment revenue, this account it is debited.
• Gain on sale of investments is a revenue account. In order to close the gain on sale of investment, this account it is debited.
• Loss on sale of investments, decrease stockholders’ equity value. However to close the loss account it is credited.
• Net unrealized holding gains and losses—I/S, denotes a loss, which decreases stockholders’ equity value. However to close the loss account it is credited.

Working Notes:

Compute the investment revenue.

$\begin{array}{c}\text{Investment revenue = \$5,000,000 + \$200,000}\\ \text{= \$5,200,000}\end{array}$ (6)

Compute the gain on sale of investments.

$\begin{array}{c}\text{Gain on sale of investments = \$8,000,000 + \$100,000 + \$1,000,000}\\ \text{= \$8,100,000 + \$1,000,000}\\ \text{= \$9,100,000}\end{array}$ (7)

Compute the loss on sale of investments.

$\begin{array}{c}\text{Loss on sale of investments = \$11,000,000 + \$1,000,000 + \$2,000,000}\\ \text{= \$12,000,000 + \$2,000,000}\\ \text{= \$14,000,000}\end{array}$ (8)

Compute the income Summary.

$\begin{array}{c}\text{Income Summary = \$5,200,000 + \$9,100,000 }-\left(\text{\$14,000,000+ \$1,000,000}\right)\\ \text{= \$14,300,000 }-\text{ \$15,000,000}\\ \text{= \$700,000}\end{array}$ (9)

b)

To determine

To Prepare: The Income statement and Balance sheet of Company ASF for the year 2016.

Explanation of Solution

Balance Sheet: Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet of Company AFS for the year ending 2016.

Company AFS
Balance Sheet
December 31, 2016
Particulars	Amount ($)	Amount ($)
Assets
Short term Investments
Equity Investments	$11,000,000
Less- Fair value adjustment	$1,000,000
Total Short term Investments		$10,000,000

Table (18)

The balance sheet of Company AFS shall show the short term investments of $10,000,000.

Income statement: Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Prepare the income statement of Company AFS for the year ending 2016.

Company AFS
Income Statement
For the year ended December 31 , 2016
Particulars	Amount ($)	Amount ($)
Investment revenue	$5,200,000
Gain on sale of investments	$9,100,000
Loss on sale of investments	(-) $14,000,000
Unrealized holding loss on investments	(-) $1,000,000

Table (19)

The above elements shall be shown in the income statement of Company AFS.

c)

To determine

To Journalize: The transactions of Company ASF for the year 2019.

Explanation of Solution

Sold the remaining shares of Company FI on January 2, 2017:

1. i. Prepare the journal entry to record the gain from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
01.02.17	Fair value adjustment  (10)	$200,000
	Unrealized holding gain—NI		$200,000
	(To record the gain on adjustment)

 Table (20)

• Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on January 2, 2017.
• Unrealized Holding Gain–NI 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, it is credited.

Working Notes:

Compute the unrealized gain as on January 2, 2017, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2016	11,000,000
Adjustment needed to update fair value (Balancing figure) (10)	800,000
Fair value adjustment balance needed on December 31, 2017	10,200,000

Table (21) (10)

1. ii. Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.31.17	Cash	$10,200,000
	Loss on sale of investments	$800,000
	Investment in  bonds of Company FF		$11,000,000
	(To record the sale of the bonds of Company FF)

Table (22)

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Loss reduces the stockholder's equity; hence debit the loss.
• Investment in shares of Company FI is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the bonds of Company W on January 5, 2017:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
01.05.17	Investment in  bonds of Company W	$34,000,000
	Cash		$34,000,000
	(To record the investment made in Company W)

Table (23)

• Investments is being made, this increases the assets; hence debit the investment.
• Cash is being paid, cash is an asset which is being reduced; hence credit the cash account