Fundamental Accounting Principles
Fundamental Accounting Principles
23rd Edition
ISBN: 9781259536359
Author: John J Wild, Ken Shaw Accounting Professor, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter 15, Problem 1APSA
To determine

Concept Introduction:

Trading securities are the investments made in the securities with the intent to sell them in short-term.

The Fair-Value adjustments are recorded at the year-end to record the deviations from the price at which securities have been purchased. If the fair value of the shares at the year-end are more than the price at which shares are purchased, the unrealized gain will be recorded, if it less than unrealized loss is recorded and fair value adjustment accounts are created.

To prepare:

Journal entries for Carlsville Company for the years 2017, 2018 and 2019.

Expert Solution & Answer
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Answer to Problem 1APSA

Solution:

The journal entries for Carlsville Company for the years 2017, 2018 and 2019 are

For the year 2017

Date Accounts Titles and Descriptions Debit ( in $ ) Credit ( in $ )
2017      
Jan-20 Short-term investment - Ford Motor 20,925  
  Cash   20,925
  (To record purchase of equity shares of Ford )    
       
Feb-09 Short-term investment - Lucent 97,928  
  Cash   97,928
  (To record purchase of equity shares of Lucent )    
       
Oct-12 Short-term investment - Z -seven 5,825  
  Cash   5,825
  (To record purchase of equity shares of Z-seven )    
       
Dec-31 Fair Value adjustment - trading 5,322  
  Unrealised gain   5,322
  To adjust the trading securities amount to $ 130,000)    

Explanation of Solution

The above journal entries can be explained as under

In the transaction on Jan. 20, the shares of Ford Motor Co. were purchased for $ 26 per shares add commission.

The purchase price will be calculated as

Purchase price = ( $ 26 X 800 shares ) + $ 125

Purchase price = $ 20,925

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited.

In the transaction on Feb. 09, the shares of Lucent Co. were purchased for $ 44.25 per shares add commission $ 578.

The purchase price will be calculated as

Purchase price = ( $ 44.25 X 2,200 shares ) + $ 578

Purchase price = $ 97,928

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited.

In the transaction on Oct. 12, the shares of Z-Seven Co. were purchased for $ 7.50 per shares add commission $ 200.

The purchase price will be calculated as

Purchase price = ( $ 7.50 X 750 shares ) + $ 200

Purchase price = $ 5,825

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited.

In the transaction on Dec. 31, the prices of the shares purchased need to be adjusted to a Fair value of $ 130,000. The amount of gain or loss on the shares will be calculated as under

Unrealised gain or (loss) = Fair value  Total Cost of the shares

Unrealised gain or (loss) = $ 130,000  ( $20,925 + $97,928+$5,825) Unrealised gain or (loss) =$5,322

Since, there is unrealised gain, we will debit the Fair value adjustment account and credit unrealised gain.

For the year 2018

Date Accounts Titles and Descriptions Debit ( in $ ) Credit ( in $ )
2018      
Apr-15 Cash 22915  
  Short-term investment - Ford Motor   20,925
  Gain on short term investment   1,990
  (To record sale of Ford securities)    
       
Jul-05 Cash 7585  
  Short-term investment - Z -seven   5,825
  Gain on short term investment   1,760
  (To record sale of Z- Seven securities)    
       
Jul-22 Short-term investment - Hunt 48,444  
  Cash   48,444
  (To record purchase of equity shares of Hunt )    
       
Aug-19 Short-term investment - Donna Karan 33,140  
  Cash   33,140
  (To record purchase of equity shares of Donna Karan )    
       
Dec-31 Unrealised Loss 24,834  
  Fair Value adjustment - trading   24,834
  To adjust the trading securities amount to $ 160,000)    

Explanation:

The above journal entries can be explained as under

In the transaction on Apr. 15, the shares of Ford Motor Company were sold for $ 29 per share less commission.

The sale amount will be calculated as under

Selling price = ( $ 29 X 800 shares ) - $ 285

Selling price=$22,915

Now, the gain will be calculated as under

Gainonsaleofshares=SellingpricePurchasepriceGainonsaleofshares=$22,915$20,925Gainonsaleofshares=$1,990

Cash has been debited as the cash has been received and gain on sale and shares of Ford Company are credited.

In the transaction on July 5, the shares of Z-Seven Company were sold for $ 10.25 per share less commission.

The sale amount will be calculated as under

Selling price = ( $ 10.25 X 750 shares ) - $ 102.5

Selling price=$7,585

Now, the gain will be calculated as under

Gainonsaleofshares=SellingpricePurchasepriceGainonsaleofshares=$7,585$5,825Gainonsaleofshares=$1,760

Cash has been debited as the cash has been received and gain on sale and shares of Z-Seven Company are credited.

In the transaction on July 22, the shares of Hunt Corp. were purchased for $ 30 per share add commission $ 444

The purchase price will be calculated as

Purchase price = ( $ 30 X 1,600 shares ) + $ 444

Purchase price = $ 48,444

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited.

In the transaction on Aug. 19, the shares of Donna Karan were purchased for $ 18.25 per share add commission $ 290.

The purchase price will be calculated as

Purchase price = ( $ 18.25 X 1,800 shares ) + $ 290

Purchase price =$33,140

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited

In the transaction on Dec. 31, the prices of the shares purchased need to be adjusted to a Fair value of $ 160,000. The amount of gain or loss on the shares will be calculated as under

Unrealised gain or (loss) = Fair value  Total Cost of the shares

Unrealised gain or (loss) = $ 130,000  ( $160,000 + $97,928+$33,140+$48,444 +$5,322) Unrealised gain or (loss) =$24,834

Since, there is unrealised loss, we will credit the Fair value adjustment account and debit unrealised loss.

Note: The fair value adjustment of $ 5,322 is also considered since we had adjusted the prices of the shares of the last year as per the prevailing current prices of that time.

For the year 2019

Date Accounts Titles and Descriptions Debit ( in $ ) Credit ( in $ )
2019      
Feb-27 Short-term investment - HCA 116,020  
  Cash   116,020
  (To record purchase of equity shares of HCA )    
       
Mar-03 Cash 39,750  
  Loss on sale of Short term investment 8,694  
  Short term investment - Hunt   48,444
  (To record sale of securities of Hunt)    
       
Jun-21 Cash 91,980  
  Loss on sale of Short term investment 5,948  
  Short term investment - Lucent   97,928
  (To record sale of securities of Lucent)    
       
Jun-30 Short term investment - Black & Decker 57,595  
  Cash   57,595
  (To record purchase of equity shares of Black & Decker )    
       
Nov-01 Cash 32,541  
  Loss on sale of Short term investment 599  
  Short term investment - Donna Karan   33,140
  (To record sale of securities of Lucent)    
       
Dec-31 Unrealised Loss 18,449  
  Fair value adjustment - Trading   18,449
  To adjust the trading securities amount to $ 180,000)    

Explanation:

The above journal entries can be explained as under

In the transaction on Feb. 27, the shares of HCA were purchased for $ 34 per share add commission $ 420

The purchase price will be calculated as

Purchase price = ( $ 34 X 3,400 shares ) + $ 420

Purchase price = $ 116,020

The shares have been purchased, thus they have been debited and they are purchased for cashthus, cash has been credited.

In the transaction on Mar. 3, the shares of Hunt Company were sold for $ 25 per share less commission.

The sale amount will be calculated as under

Selling price = ( $25 X 1,600 shares ) - $ 250

Selling price=$39,750

Now, the loss will be calculated as under

Lossonsaleofshares=SellingpricePurchasepriceLossonsaleofshares=$39,750$48,444Lossonsaleofshares=$8,694

Cash and loss on sale has been debited as the cash has been received and shares of Hunt Company are credited.

In the transaction on June 21, the shares of Lucent Company were sold for $ 42 per share less commission.

The sale amount will be calculated as under

Selling price = ( $4X 2,200 shares ) - $ 420

Selling price=$91,980

Now, the loss will be calculated as under

Lossonsaleofshares=SellingpricePurchasepriceLossonsaleofshares=$91,980$97,928Lossonsaleofshares=$5,948

Cash and loss on sale has been debited as the cash has been received and shares of Lucent Company are credited.

In the transaction on June 30, the shares of Black & Decker were purchased for $ 47.50 per share add commission $ 595

The purchase price will be calculated as

Purchase price = ( $ 47.50 X 1,200 shares ) + $ 595

Purchase price = $ 57,595

The shares have been purchased, thus they have been debited and they are purchased for cashthus, cash has been credited.

In the transaction on Nov. 1, the shares of Donna Karan were sold for $ 18.25 per share less commission.

The sale amount will be calculated as under

Selling price = ( $18.25 X 1,800 shares ) - $309

Selling price=$32,541

Now, the loss will be calculated as under

Lossonsaleofshares=SellingpricePurchasepriceLossonsaleofshares=$32,541$33,140Lossonsaleofshares=$599

Cash and loss on sale has been debited as the cash has been received and shares of Donna Karan Company are credited.

In the transaction on Dec. 31, the prices of the shares purchased need to be adjusted to a Fair value of $ 180,000. The amount of gain or loss on the shares will be calculated as under

Unrealised gain or (loss) = Fair value  Total Cost of the shares

Unrealised gain or (loss) = $ 180,000  ( $116,020 +$57,595+$24,834) Unrealised gain or (loss) =$18,449

Since, there is unrealised loss, we will credit the Fair value adjustment account and debit unrealised loss.

Note: The fair value adjustment of $ 24,834 is also considered since we had adjusted the prices of the shares of the last year as per the prevailing current prices of that time.

Conclusion

Thus, all the journal entries for all the three years have been prepared.

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Chapter 15 Solutions

Fundamental Accounting Principles

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