Loose Leaf for Fundamental Accounting Principles
Loose Leaf for Fundamental Accounting Principles
23rd Edition
ISBN: 9781259687709
Author: John J Wild, Ken Shaw Accounting Professor, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter 15, Problem 2BPSB
To determine

Concept Introduction:

Available-for-sale investments:

Available-for-sale investments are the investments which neither fall in the category of trading investments nor fall in the category of held-to-maturity investments.

They are recorded at fair market value. The effects of fluctuations in the prices i.e. increase or decrease in prices at the year-end are adjusted and unrealized gain or loss due to these fluctuations are transferred to other comprehensive income.

Other comprehensive income is not included in net income. Other comprehensive income are shown after net income in the income statement.

Requirement 1

To prepare:

Journal entries to record the preceding transactions and events.

Expert Solution
Check Mark

Answer to Problem 2BPSB

Solution:

Date Accounts Titles and Descriptions Debit ( in $ ) Credit ( in $ )
2017      
Feb. 6 Short term investments -- AFS(Nokia) 143,250  
  Cash   143,250
  (To record purchase of AFS securities)    
       
Feb. 15 Short term investments -- AFS(T-bills) 20,000  
  Cash   20,000
  (To record purchase of AFS securities)    
       
Apr. 7 Short term investments -- AFS (Dell Co.) 48,655  
  Cash   48,655
  (To record purchase of AFS securities)    
       
June 2 Short term investments -- AFS(Merck) 184,140  
  Cash   184,140
  (To record purchase of AFS securities)    
       
June 30 Cash 646  
  Dividend Revenue   646
  (To record dividend received)    
       
Aug. 11 Cash 38,050  
  Realized gain on sale of available securities   2,237
  Short term investments -- AFS(Nokia)   35,813
  (To record sale of Nokia securities)    
       
Aug-16 Cash 20,600  
  Short term investments -- AFS(T-bills)   20,000
  Interest revenue   600
       
Aug. 24 Cash 120  
  Dividend revenue   120
  (To record receipt of dividend revenue)    
       
Nov. 9 Cash 510  
  Dividend revenue   510
  (To record receipt of dividend revenue)    
       
Dec-31 Cash 180  
  Dividend revenue   180
  (To record receipt of dividend revenue)    

Explanation of Solution

The above journal entries can be explained as under

Feb. 6 The shares are purchased for $ 41.25 per share add commission $ 3,000

The purchase price is calculated as under

Purchase price = ( $ 41.25 X 3,400 shares ) + $ 3,000

Purchase price = $ 143,250

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

Feb. 15 The treasury bills (debt securities) are purchased for $ 20,000. Thus, short-term investment- AFS (T-bills) are debited and cash is credited.

Apr. 7 The shares are purchased for $ 39.50 per share add commission $ 1,255

The purchase price is calculated as under

Purchase price = ( $ 39.50 X 1,200 shares ) + $ 1,255

Purchase price = $ 48,665

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

June 2 The shares are purchased for $ 72.50 per share add commission $ 2,890

The purchase price is calculated as under

Purchase price = ( $ 72.50 X 2,500 shares ) + $ 2,890

Purchase price = $ 184,140

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

June 30 The dividend is received on Nokia’s Stock. The dividend is calculated as under

Dividend received = Number of shares X Dividend per shareDividend received = 3,400 shares X $ 0.19 per shareDividend received = $ 646

Aug. 11 the shares of Nokia were sold for $ 46 per share less commission.

The sale amount will be calculated as under

Selling price = ( $ 46 X 850 shares ) - $ 1,050

Selling price=$38,050

Now, the gain will be calculated as under

Gainonsaleofshares=SellingpricePurchasepriceGainonsaleofshares=$38,050($143,2503,400sharesX850shares)Gainonsaleofshares=$38,050$35,813Gainonsaleofshares=$2,237

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

Aug. 16 The T-bills are redeemed on maturity. Thus, the cash received = Principal + Interest.

The total cash is calculated as under

Totalcashreceived=$20,000+$20,000X6%X6months12months Totalcashreceived=$20,000+$600Totalcashreceived=$20,600

Thus, cash is debited and T-bills and interest revenue is credited.

Aug. 24 The dividend is received on Dell Co. Stock. The dividend is calculated as under

Dividend received = Number of shares X Dividend per shareDividend received = 1,200 shares X $ 0.10 per sharesDividend received = $ 120.

Nov. 9 The dividend is received on Nokia’s Stock. The dividend is calculated as under

Dividend received = Number of shares X Dividend per shareDividend received = 2,550 shares X $0.2 per sharesDividend received = $510

Dec. 18 The dividend is received on Dell Co. Stock. The dividend is calculated as under

Dividend received = Number of shares X Dividend per shareDividend received = 1,200 shares X $ 0.15 per sharesDividend received = $ 180

Conclusion

Thus, all the journal entries have been recorded and explained.

To determine

Requirement 2

To prepare:

A table to compare year-end cost and fair values of Slip Systems’ short-term investments in available for sale securities.

Expert Solution
Check Mark

Answer to Problem 2BPSB

Solution:

AFS securities Number of Shares Cost Total Fair Value Total Increased or decreased
Nokia 2,550 42.13 107,437 40.25 102,637.5 -4,799.5
Dell Co. 1,200 40.55 48,655 40.50 48,600 -55
Merck 2,500 73.66 184,140 59 147,500 -36,640
          298,737.5 -41,494.5

Explanation of Solution

The table has been prepared. The fair value per share for each stock has been given in the question and the cost has been calculated in the calculations above.

The per unit cost of each share is calculated as under

Perunitcost=TotalcostNumberofshares Nokia=$107,4372,550shares=$42.13DellCo.=$48,6651,200shares=$40.55Merck=$184,1402,500shares=$73.66

Conclusion

Thus, all the cost and fair value for all the shares have been compared and it can be concluded that there is an unrealized loss on the AFS securities of $ 4,470.

To determine

Requirement 3

To prepare:

An adjusting entry to record the year-end fair value adjustment for the portfolio of short-term investments.

Expert Solution
Check Mark

Answer to Problem 2BPSB

Solution:

Date Accounts Titles and Descriptions Debit ( in $ ) Credit ( in $ )
Dec-31 Unrealised Loss 41,494.5  
  Available for Sale securities   41,494.5
  (To record unrealized loss on the AFS securities)    

Explanation of Solution

The loss has been calculated from the table above

AFS securities Number of Shares Cost Total Fair Value Total Increased or decreased
Nokia 2,550 42.13 107,437 40.25 102,637.5 -4,799.5
Dell Co. 1,200 40.55 48,655 40.50 48,600 -55
Merck 2,500 73.66 184,140 59 147,500 -36,640
          298,737.5 -41,494.5
Conclusion

Thus, the adjusting journal entry has been recorded for the year-end for the available for sale securities.

To determine

Requirement 4

To explain:

Balance sheet presentation of the fair value adjustment for Slip Systems’ short-term investments.

Expert Solution
Check Mark

Explanation of Solution

Slip Systems Company
Balance sheet
December 31st, 2017
Assets     Total liabilities and equity    
Current Assets     Current Liabilities    
Short-term investments - AFS   298,738 ----    
      Long-term liabilities    
Long-term investments     ----    
      Total Liabilities    
           
      Stockholder's equity    
      ----    
      Accumulated other comprehensive income / Loss (41,494) (41,494)

The available-for-sale short-term securities are recorded at the fair value as given by the market under the head current assets in the asset section of the balance sheet. The unrealized loss is recorded in the stockholder’s equity under the head “Accumulated other comprehensive income/loss”.

Conclusion

This is how, the available-for-sale short-term securities are recorded in the balance sheet.

To determine

Requirement 5

To determine:

How short-term investments affects Slip Systems’ (a) income statement for the year 2017 and (b) the equity section of its balance sheet at year-end 2017.

Expert Solution
Check Mark

Explanation of Solution

(e) Income statement

The unrealized loss will be recorded in the other comprehensive income section of the income statement after the net income is recorded.

This is how, the income statement is effected with short-term investments of Slip Systems.

(f) The equity section of its balance sheet ate year-end 2017.

The unrealized loss will be added to other comprehensive income account as loss and it is shown under stockholder’s equity section. It will reduced the total amount of total equity by the amount of unrealized loss.

Conclusion

Thus, the effects of short-term investments on affects Slip Systems’ (a) income statement for the year 2017 and (b) the equity section of its balance sheet at year-end 2017 have been discussed.

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Chapter 15 Solutions

Loose Leaf for Fundamental Accounting Principles

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