Paris Inc. began operations in Year 1. Following is a series of transactions and events involving its long-term debt investments in available-for-sale securities.
Required
- 1. Prepare
journal entries to record these transactions and events and any year-end fair value adjustments to the portfolio of long-term available-for-sale debt securities. - 2. Prepare a table that summarizes the (a) total cost, (b) total fair value adjustment, and (c) total fair value for the portfolio of long-term available-for-sale debt securities at each year-end.
- 3. Prepare a table that summarizes (a) the realized gains and losses and (b) the unrealized gains or losses for the portfolio of long-term available-for-sale debt securities at each year-end.
1.
Prepare journal entries to record the given transaction.
Explanation of Solution
Journal entry:
Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Prepare the journal entries to record the given transactions as follows:
Journal | ||||
Date | Account Title and Explanation | Post | Debit | Credit |
Ref. | ($) | ($) | ||
March 10, Year 1 | Debt Investments -AFS (Company A) | 30,600 | ||
Cash | 30,600 | |||
(To record the purchase of bonds) | ||||
April 7, Year 1 | Debt Investments—AFS (Company F) | 56,250 | ||
Cash | 56,250 | |||
(To record the purchase of F notes) | ||||
September, 1 Year 1 | Debt Investments —AFS (Company P) | 28,200 | ||
Cash | 28,200 | |||
(To record the purchase of bonds) | ||||
December 31, Year 1 | Fair Value Adjustment—AFS | 1,950 | ||
Unrealized Gain—Equity (LT) (2) | 1,950 | |||
(To record the annual adjustment to fair value of securities) | ||||
April 26, Year 2 | Cash | 51,250 | ||
Loss on sale of debt investments (3) | 5,000 | |||
Debt investment—AFS (Company F) | 56,250 | |||
(To record the gain on sale of bond) | ||||
June 2, Year 2 | Debt Investments—AFS (Company D) | 34,650 | ||
Cash | 34,650 | |||
(To record the purchase of bond) | ||||
June 14, Year 2 | Debt Investments —AFS (Company S) | 25,200 | ||
Cash | 25,200 | |||
(To record the purchase of bond) | ||||
November, 27 Year 2 | Cash | 30,600 | ||
Gain on Sale of Investments (4) | 2,400 | |||
Debt Investments—AFS (Company P) | 28,200 | |||
(To record the loss on sale of bond) | ||||
December 31, Year 2 | Fair Value Adjustment—AFS | 1,400 | ||
Unrealized Gain—Equity (LT) (6) | 1,400 | |||
(To record the Annual adjustment to fair value of securities) | ||||
January 28, Year 3 | Debt Investments—AFS (Company C) | 40,000 | ||
Cash | 40,000 | |||
(To record the purchase of bonds) | ||||
August 22, Year 3 | Cash | 25,800 | ||
Loss on Sale of Investments (7) | 4,800 | |||
Debt Investments—AFS (Company A) | 30,600 | |||
(To record the sale of bond) | ||||
September 3, Year 3 | Debt Investments—AFS (Company M) | 84,000 | ||
Cash | 84,000 | |||
(To record the purchase of bonds) | ||||
October 9, Year 3 | Cash | 28,800 | ||
Gain on Sale of Investments (8) | 3,600 | |||
Debt Investments—AFS (Company S) | 25,200 | |||
(To record the sale of bonds) | ||||
October 31, Year 3 | Cash | 27,000 | ||
Loss on Sale of Investments (9) | 7,650 | |||
Debt Investments—AFS (Company D) | 34,650 | |||
(To record the sale of bond) | ||||
December 31, Year 3 | Fair Value Adjustment—AFS | 5,450 | ||
Unrealized Gain—Equity (LT) (11) | 5,450 | |||
(To record the Annual adjustment to fair value of securities) |
Table (1)
Working note:
Calculate the total cost and fair value of the bonds for Year 1:
Name of the company | Cost of debt investment | Fair value of debt investment |
Company A | $30,600 | $33,000 |
Company F | $56,250 | $54,600 |
Company P | $28,200 | $29,400 |
Total | $115,050 | $117,000 |
Table (2)
…… (1)
Calculate the unrealized gain or loss for year 1:
Calculate the value of cash received from the sale of stock investment (Company F stocks)
Calculate the value of cash received from the sale of stock investment (Company P stocks)
Calculate the total cost and fair value of the bonds for Year 2:
Name of the company | Cost of debt investment | Fair value of debt investment |
Company A | S30,600 | $31,200 |
Company F | $34,650 | $32,400 |
Company S | $25,200 | $27,600 |
Total | $90,450 | $91,000 |
Table (3)
…… (5)
Calculate the unrealized gain or loss for year 2:
Calculate the value of cash received from the sale of stock investment (Company A stocks)
Calculate the value of cash received from the sale of stock investment (Company S stocks)
Calculate the value of cash received from the sale of stock investment (Company D stocks)
Calculate the total cost and fair value of the bonds for Year 3:
Name of the company | Cost of debt investment | Fair value of debt investment |
Company C | $40,000 | $48,000 |
Company M | $84,000 | $82,000 |
Total | $124,000 | $130,000 |
Table (4)
…… (10)
Calculate the unrealized gain or loss for year 3:
2.
Prepare a table that summarizes the following
- a. Total cost,
- b. Total fair value adjustments,
- c. Total fair value of the portfolio of long-term available-for-sale securities at year-end.
Explanation of Solution
Prepare a table that summarizes the total cost, total fair value adjustments, and the total fair value as follows:
Particulars | December 31, Year 1 | December 31, Year 2 | December 31, Year 3 |
a. Long-term AFS Securities (cost) | $115,050 | $90,450 | $124,000 |
b. Fair Value Adjustment | 1,950 | 550 | 6,000 |
c. Long-term AFS Securities (fair value) | $117,000 | $91,000 | $130,000 |
Table (5)
3.
Prepare a table that summarizes the following
- a. The realized gains and losses,
- b. The unrealized gains and losses for the portfolio of long-term available-for-sale securities at year-end.
Explanation of Solution
- a. Prepare a table that summarizes the realized gains and losses as follows:
Particulars | Year 1 | Year 2 | Year 3 |
Realized gains (losses) | |||
Sale of F shares | $(5,000 ) | ||
Sale of P shares | 2,400 | ||
Sale of A shares | $(4,800) | ||
Sale of S shares | $3,600 | ||
Sale of D shares | $(7,650) | ||
Total realized gain (loss) | $0 | $ (2,600) | $(8,850) |
Table (6)
- b. Prepare a table that summarizes the Unrealized gains and losses as follows
Particulars | Year 1 | Year 2 | Year 3 |
Unrealized gains (losses) at year-end | $1,950 | $ 550 | $ 6,000 |
Table (7)
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