Loose Leaf For Fundamental Accounting Principles Format: Loose-leaf
Loose Leaf For Fundamental Accounting Principles Format: Loose-leaf
24th Edition
ISBN: 9781260158557
Author: Wild
Publisher: Mcgraw Hill Publishers
bartleby

Videos

Question
Book Icon
Chapter 15, Problem 2BPSB
To determine

Concept Introduction:

Fair value of Securities:

When an investment is purchased, it is required to revalue the investment at the end of the year in order to make sure the fair value is correctly reflected in the financial statements.

Fair value refers to the realizable value of the securities at the end of a reporting period. It can be viewed as the replacement cost of the securities if such securities were purchased today.

If the cost of purchase is higher than the fair value of the investment at the time of revaluation, then the difference is debited to the fair value adjustments account.

If the cost of purchase is lower than the fair value of the investment at the time of revaluation, then the difference is debited to the fair value adjustments account.

Journal Entries:

Journal entries are the first step in recording financial transactions and preparation of financial statements.

These represent the impact of the financial transaction and demonstrate the effect on the accounts impacted in the form of debits and credits.

Assets and expenses have debit balances and Liabilities and Incomes have credit balances and according to the business transaction, the accounts are appropriately debited will be credited by credited to reflect the effect of business transactions and events.

Requirement 1:

Journal entries to record the transactions including fair value adjustments

Expert Solution
Check Mark

Answer to Problem 2BPSB

Following are the Journal entries to record the transactions including fair value adjustments

    Date ParticularsDebit ($)Credit ($)
    Year 1
    Mar-10Bonds (Apple) $ 30,600.00
    Cash $ 30,600.00
    (Being Bonds purchased)
    Apr-07Notes (Ford) $ 56,250.00
    Cash $ 56,250.00
    (Being Notes purchased)
    Sep-01Bonds (Polaroid) $ 28,200.00
    Cash $ 28,200.00
    (Being Bonds purchased)
    Dec-31Fair Value Adjustment $1,650.00
    Notes (Ford) $1,650.00
    (Being fair value adjustments made)
    Dec-31Bonds (Apple) $2,400.00
    Bonds (Polaroid) $1,200.00
    Fair Value Adjustment $3,600.00
    (Being fair value adjustments made)
    Year 2
    Apr-26Cash $ 51,250.00
    Loss on Sale of Investments $3,350.00
    Notes (Ford) $ 54,600.00
    (Being Bonds sold)
    Jun-02Bonds (Duracell) $ 34,650.00
    Cash $ 34,650.00
    (Being Bonds purchased)
    Jun-14Notes (Sears) $ 25,200.00
    Cash $ 25,200.00
    (Being Notes purchased)
    Nov-27Cash $ 30,600.00
    Gain on Sale of Investments $1,200.00
    Bonds (Polaroid) $ 29,400.00
    (Being Bonds sold)
    Dec-31Bonds (Apple) $400.00
    Notes (Sears) $2,400.00
    Fair Value Adjustment $2,800.00
    (Being fair value adjustments made)
    Dec-31Fair Value Adjustment $2,250.00
    Bonds (Duracell) $2,250.00
    (Being fair value adjustments made)
    Year 3
    Jan-28Bonds (Coca Cola) $ 40,000.00
    Cash $ 40,000.00
    (Being Bonds purchased)
    Aug-22Cash $ 25,800.00
    Loss on Sale of Investments $5,200.00
    Bonds (Apple) $ 31,000.00
    (Being Bonds sold)
    Sep-03Notes (Motorola) $ 84,000.00
    Cash $ 84,000.00
    (Being Notes purchased)
    Oct-09Cash $ 28,800.00
    Gain on Sale of Investments $1,200.00
    Notes (Sears) $ 27,600.00
    (Being Notes sold)
    Oct-31Cash $ 27,000.00
    Loss on Sale of Investments $7,650.00
    Bonds (Duracell) $ 34,650.00
    (Being Bonds sold)
    Dec-31Fair Value Adjustment $2,000.00
    Notes (Motorola) $2,000.00
    (Being fair value adjustments made)
    Dec-31Bonds (Coca Cola) $8,000.00
    Fair Value Adjustment $8,000.00
    (Being fair value adjustments made)

Explanation of Solution

Assets and Expenses have debit balances and must be debited in order to increase their balance and credited in order to decrease their balance. Examples − Bonds and Notes of other companies, Cash, Loss on sale of Investments

Liabilities and Incomes have credit balances and must be debited in order to decrease their balance and credited in order to increase their balance. Examples − Gain on sale of Investments

When an investment is made, it must be revalued at the end of the year to determine if it is in line with the fair value or the realizable value.

Such a revaluation seeks to eliminate the difference between the cost of purchase and the realizable value of the investment at the end of the year.

If the cost of purchase is higher than the fair value, then the difference is debited to the fair value adjustments account.

If the cost of purchase is lower than the fair value, then the difference is debited to the fair value adjustments account.

In Year 1,

On Mar-10 Bonds (Apple) will be debited by $ 30,600.00 & Cash will be credited by $ 30,600.00 since Bonds purchased.

On Apr-07 Notes (Ford) will be debited by $ 56,250.00 & Cash will be credited by $ 56,250.00 since Notes purchased.

On Sep-01 Bonds (Polaroid) will be debited by $ 28,200.00 & Cash will be credited by $ 28,200.00 since Bonds purchased.

On Dec-31 Fair Value Adjustment will be debited by $ 1,650.00 & Notes (Ford) will be credited by $ 1,650.00 since fair value adjustments made.

On Dec-31 Bonds (Apple) will be debited by $ 2,400.00, Bonds (Polaroid. will be debited by $ 1,200.00 & Fair Value Adjustment will be credited by $ 3,600.00 since fair value adjustments made.

In Year 2,

On Apr-26 Cash will be debited by $ 51,250.00, Loss on Sale of Investments will be debited by $ 3,350.00 & Notes (Ford) will be credited by $ 54,600.00 since Bonds sold.

On Jun-02 Bonds (Duracell) will be debited by $ 34,650.00 and Cash will be credited by $ 34,650.00 since Bonds purchased.

On Jun-14 Notes (Sears) will be debited by $ 25,200.00 and Cash will be credited by $ 25,200.00 since Notes purchased.

On Nov-27 Cash will be debited by $ 30,600.00, Gain on Sale of Investments will be credited by $ 1,200.00 & Bonds (Polaroid) will be credited by $ 29,400.00 since Bonds sold.

On Dec-31 Bonds (Apple) will be debited by $ 400.00, Notes (Sears) will be debited by $ 2,400.00 & Fair Value Adjustment will be credited by $ 2,800.00 since fair value adjustments made.

On Dec-31 Fair Value Adjustment will be debited by $ 2,250.00 and Bonds (Duracell) will be credited by $ 2,250.00 since fair value adjustments made.

In Year 3,

On Jan-28 Bonds (Coca Cola) will be debited by $ 40,000.00 & Cash $ 40,000.00 since Bonds purchased.

On Aug-22 Cash will be debited by $ 25,800.00, Loss on Sale of Investments will be credited by $ 5,200.00 & Bonds (Apple) $ 31,000.00 since Bonds sold.

On Sep-03 Notes (Motorola) will be debited by $ 84,000.00 & Cash will be credited by $ 84,000.00 since Notes purchased.

On Oct-09 Cash will be debited by $ 28,800.00, Gain on Sale of Investments will be credited by $ 1,200.00 and Notes (Sears) $ 27,600.00 since Notes sold.

On Oct-31 Cash will be debited by $ 27,000.00, Loss on Sale of Investments will be debited by $ 7,650.00 and Bonds (Duracell) will be credited by $ 34,650.00 since Bonds sold.

On Dec-31 Fair Value Adjustment will be debited by $ 2,000.00 & Notes (Motorola) will be credited by $ 2,000.00 since fair value adjustments made)

On Dec-31 Bonds (Coca Cola) will be debited by $ 8,000.00 & Fair Value Adjustment $ 8,000.00 since fair value adjustments made)

Hence the transactions are journalized and fair value adjustments are made.

To determine

Concept Introduction:

Fair value of Securities:

When an investment is purchased, it is required to revalue the investment at the end of the year in order to make sure the fair value is correctly reflected in the financial statements.

Fair value refers to the realizable value of the securities at the end of a reporting period. It can be viewed as the replacement cost of the securities if such securities were purchased today.

If the cost of purchase is higher than the fair value of the investment at the time of revaluation, then the difference is debited to the fair value adjustments account.

If the cost of purchase is lower than the fair value of the investment at the time of revaluation, then the difference is debited to the fair value adjustments account.

Requirement 2:

Table showing details of total cost of purchase, total fair value adjustments and total available value of securities at the end of each year.

Expert Solution
Check Mark

Answer to Problem 2BPSB

Following table shows details of total cost of purchase, total fair value adjustments and total available value of securities at the end of each year.

    YearBonds and NotesTotal CostTotal Fair Value AdjustmentsTotal Value of Portfolio available for Sale
    1Apple $30,600.00 $2,400.00 $ 33,000.00
    Ford $56,250.00 $(1,650.00) $ 54,600.00
    Polaroid $28,200.00 $1,200.00 $ 29,400.00
    Total $ 115,050.00 $1,950.00 $ 117,000.00
    2Apple $30,600.00 $400.00 $ 31,000.00
    Duracell $34,650.00 $(2,250.00) $ 32,400.00
    Sears $25,200.00 $2,400.00 $ 27,600.00
    Total $90,450.00 $550.00 $ 91,000.00
    3Coca-Cola $40,000.00 $8,000.00 $ 48,000.00
    Motorola $84,000.00 $(2,000.00) $ 82,000.00
    Total $ 124,000.00 $6,000.00 $ 130,000.00

Explanation of Solution

When an investment is made, it must be revalued at the end of the year to determine if it is in line with the fair value or the realizable value.

Such a revaluation seeks to eliminate the difference between the cost of purchase and the realizable value of the investment at the end of the year.

If the cost of purchase is higher than the fair value, then the difference is debited to the fair value adjustments account.

If the cost of purchase is lower than the fair value, then the difference is debited to the fair value adjustments account.

In the above table, Total Fair Value Adjustments is calculated as the Total Value of Portfolio available for Sale less the total cost of purchase and appropriate debit or credit is made to the Fair value adjustments account at the end of the year in order to correctly reflect the value in the financial statements.

Hence the table showing details of total cost of purchase, total fair value adjustments and total available value of securities at the end of each year is prepared.

To determine

Concept Introduction:

Fair value of Securities:

When an investment is purchased, it is required to revalue the investment at the end of the year in order to make sure the fair value is correctly reflected in the financial statements.

Fair value refers to the realizable value of the securities at the end of a reporting period. It can be viewed as the replacement cost of the securities if such securities were purchased today.

If the cost of purchase is higher than the fair value of the investment at the time of revaluation, then the difference is debited to the fair value adjustments account.

If the cost of purchase is lower than the fair value of the investment at the time of revaluation, then the difference is debited to the fair value adjustments account.

Requirement 3:

Table showing details of total cost of purchase, Unrealized Gain / (Losses), Realized Gain / (Losses) and Total Value of Portfolio available for Sale

Expert Solution
Check Mark

Answer to Problem 2BPSB

Following Table shows details of total cost of purchase, Unrealized Gain / (Losses), Realized Gain / (Losses) and Total Value of Portfolio available for Sale

    YearBonds and NotesTotal CostUnrealized Gain / (Losses)Realized Gain / (Losses)Total Value of Portfolio available for Sale
    1Apple $30,600.00 $2,400.00 $ - $ 33,000.00
    Ford $56,250.00 $(1,650.00) $ - $ 54,600.00
    Polaroid $28,200.00 $1,200.00 $ - $ 29,400.00
    Total $ 115,050.00 $1,950.00 $ - $117,000.00
    2Ford $56,250.00 $ - $ (5,000.00) $ -
    Duracell $34,650.00 $(2,250.00) $ 32,400.00
    Sears $25,200.00 $2,400.00 $ - $ 27,600.00
    Polaroid $28,200.00 $ - $ 2,400.00 $ -
    Apple $30,600.00 $400.00 $ - $ 31,000.00
    Total $ 174,900.00 $550.00 $ (2,600.00) $ 91,000.00
    3Coca Cola $40,000.00 $8,000.00 $ - $ 48,000.00
    Apple $30,600.00 $ - $ (4,800.00) $ -
    Motorola $84,000.00 $(2,000.00) $ 82,000.00
    Sears $25,200.00 $ - $ 3,600.00 $ -
    Duracell $34,650.00 $ - $ (7,050.00) $ -
    Total $ 214,450.00 $6,000.00 $ (8,250.00) $130,000.00

Explanation of Solution

When an investment is made, it must be revalued at the end of the year to determine if it is in line with the fair value or the realizable value.

Such a revaluation seeks to eliminate the difference between the cost of purchase and the realizable value of the investment at the end of the year.

If the cost of purchase is higher than the fair value and the investment is not sold at the end of the year, then the difference is an unrealized loss.

If the cost of purchase is lower than the fair value, and the investment is not sold at the end of the year then the difference is an unrealized gain.

In the above table, Total Unrealized Gain / (Losses) is calculated as the Total Value of Portfolio available for Sale less the total cost of purchase and appropriate debit or credit is made to the Fair value adjustments account at the end of the year in order to correctly reflect the value in the financial statements.

The Realized Gain / (Losses) are calculated as the difference between the sale price and the total cost of purchase and appropriate debit or credit is made to the Gain / Loss on sale of adjustments account to correctly record the value in the financial statements.

Hence the Table showing details of total cost of purchase, Unrealized Gain / (Losses), Realized Gain / (Losses) and Total Value of Portfolio available for Sale is prepared.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 15 Solutions

Loose Leaf For Fundamental Accounting Principles Format: Loose-leaf

Knowledge Booster
Background pattern image
Accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education
Financial instruments products; Author: fi-compass;https://www.youtube.com/watch?v=gvxozM3TUIg;License: Standard Youtube License