Principles of Financial Accounting.
Principles of Financial Accounting.
22nd Edition
ISBN: 9780077632892
Author: John J. Wild
Publisher: McGraw Hill
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Chapter 15, Problem 4BP

1.1

To determine

Prepare the journal entries to record the given transactions.

1.1

Expert Solution
Check Mark

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.

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 equities.

Credit, all increase in liabilities, revenues, and equities, all decrease in assets, and expenses.

Prepare the journal entries to record the given transactions as follows:

DateAccount Titles and DescriptionPost Ref. Debit ($) Credit ($)
January 5, 2015Long-Term Investments - Company B 200,500 
       Cash  200,500
 (To record the purchase of Company B’s shares.   
August 1, 2015Cash (1) 21,000 
        Long-term investment-Company B  21,000
 (To record the cash dividend received)   
December 31, 2015Long-Term Investments - Company B 20,500 
       Earnings from long-term investment (2)  20,500
 (To record the earnings from long-term investment)   
August 1, 2016Cash (3) 27,000 
        Long-term investment-Company B  27,000
 (To record the cash dividend received)   
December 31, 2016Long-Term Investments - Company B 19,500 
       Earnings from long-term investment (4)  19,500
 (To record the earnings from long-term investment)   
January 8, 2017Cash 375,000 
       Gain on sale of investment (6)  192,500
       Long-term investment – Company B (5)  182,500
 (To record sale of investment and gain from sale of investment)   

Table (1)

Working note:

Calculate the dividend revenue received from Company B for the year 2015

Dividends = (Number of shares×Dividend per share)=(20,000×$1.05pershare)=$21,000 (1)

Calculate the earnings from long-term investment for the year 2015

Earnings from long-term investment} = Principle×Rate×Time=$82,000×25100×1212=$20,500 (2)

Calculate the dividend revenue received from Company B for the year 2016

Dividends = (Number of shares×Dividend per share)=(20,000×$1.35pershare)=$27,000 (3)

Calculate the earnings from long-term investment for the year 2016

Earnings from long-term investment} = Principle×Rate×Time=$78,000×25100×1212=$19,500 (4)

Calculate the book value of investment

Book value of investment at the year-end 2016
Particulars$
Original cost200,500
Less: 2015 dividends(21,000)
Add: 2015 earnings20,500
Book value of investment at the year-end 2015200,000
Less: 2016 dividends(27,000)
Add:  2016 earnings19,500
Book value of investment at the yearend 2016192,500

Table (2) (5)

Calculate the gain (loss) from sale of long-term investment.

Gain (loss)on investments} = {Cash received –Purchase value}= $375,000$192,500(5)=$182,500 (6)

1.2

To determine

Ascertain the carrying (book) value per share of Company Bk’s investments in Company B common stock.

1.2

Expert Solution
Check Mark

Explanation of Solution

Ascertain the carrying (book) value per share of Company Bk’s investments in Company B common stock as follows:

Carrying value of per share} =Book value of share at the year ended 2017 (5)Number of shares purchased$192,50020,000 shares=$9.63 per share

Therefore, the carrying value per share at the end of the January 1, 2017 is $9.63.

1.3

To determine

Ascertain the net increase or decrease in Company Bk’s equity from January 5, 2015 through January 2, 2017 resulting from its investment in Company B.

1.3

Expert Solution
Check Mark

Explanation of Solution

Ascertain the net increase or decrease in Company Bk’s equity from January 5, 2015 through January 2, 2017 resulting from its investment in Company B as follows:

Net increase = (Earnings from Company B for the year 2017 (2)+Earnings from Company B for the year2018(4)+Gain on sale of investments (6))=$20,500+$19,500+$182,500=$222,500

Therefore, the net increase in Company B’s equity from January 5, 2015 through January 2, 2017 is $222,500.

2.1

To determine

Prepare the journal entries to record the given transactions.

2.1

Expert Solution
Check Mark

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.

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 equities.

Credit, all increase in liabilities, revenues, and equities, all decrease in assets, and expenses.

Prepare the journal entries to record the given transactions as follows:

DateAccount Titles and DescriptionPost Ref. Debit ($) Credit ($)
January 5, 2015Long-Term Investments - Company B 200,500 
       Cash  200.500
 (To record the purchase of Company B’s shares.   
August 1, 2015Cash (7) 21,000 
        Dividend revenue  21,000
 (To record the cash dividend received)   
December 31, 2015Fair value adjustment 37,500 
       Unrealized gain – Equity (9)  37,500
 (To record the earnings from long-term investment)   
August, 1 2016Cash (10) 27,000 
        Dividend revenue  27,000
 (To record the cash dividend received)   
December 31, 2016Fair value adjustment 35,000 
       Unrealized gain – Equity (12)  35,000
 (To record the earnings from long-term investment)   
January 2, 2017Cash 375,000 
       Gain on sale of investment (13)  200,500
       Long-term investment – Company B  174,500
 (To record sale of investment and gain from sale of investment)   
January 2, 2017Fair value adjustment 72,500 
       Unrealized gain – Equity (14)  72,500
 (To record the earnings from long-term investment)   

Table (1)

Working note:

Calculate the dividend revenue received from Company B for the year 2015

Dividends = (Number of shares×Dividend per share)=(20,000×$1.05pershare)=$21,000 (7)

Calculate the total fair value of investment at the end of the year 2015

Total fair value = Number of share×Rate per share=$20,000×$11.90=$238,000 (8)

Calculate the value of unrealized gain or loss

Short-term investment = (Total Fair value  Total cost of investment)=($238,000$200,500)=$37,500 (9)

Calculate the dividend revenue received from Company B for the year 2016

Dividends = (Number of shares×Dividend per share)=(20,000×$1.35pershare)=$27,000 (10)

Calculate the total fair value of investment at the end of the year 2015

Total fair value = Number of share×Rate per share=$20,000×$13.65=$273,000 (11)

Calculate the value of unrealized gain or loss

Short-term investment = [(Total Fair value  Total cost of investment)Unrealized gain incurred in the year 2017]=($273,000$200,500)$37,500=$35,000 (12)

Calculate the gain (loss) from sale of long-term investment.

Gain (loss)on investments} = {Cash received –Purchase value}= $375,000$200,500=$174,500 (13)

Calculate the amount of fair value adjustment

Fair value adjustment} = {Unrealized gain for the year 2017 +Unrealized gain for the year 2018}= $37,500 + $35,000=$72,500 (14)

2.2

To determine

Ascertain the carrying (book) value per share of Company B’s investments in Company B common stock.

2.2

Expert Solution
Check Mark

Explanation of Solution

Ascertain the carrying (book) value per share of Company B’s investments in Company B common stock as follows:

Carrying value of per share} =Book value of sharesNumber of shares purchased$200,50020,000 shares=$10.03 per share

Therefore, the carrying value per share at the end of the January 1, 2017 is $10.03.

2.3

To determine

Ascertain the net increase or decrease in Company B’s equity from January 5, 2015 through January 2, 2017 resulting from its investment in Company B.

2.3

Expert Solution
Check Mark

Explanation of Solution

Ascertain the net increase or decrease in Company B’s equity from January 5, 2015 through January 2, 2017 resulting from its investment in Company B as follows:

Net increase = (Dividend revenue for the year 2017 (7)+Dividend revenue for the year2018(11)+Gain on sale of investments (14))=$21,000+$27,000+$174,500=$222,500

Therefore, the net increase in Company B’s equity from January 5, 2015 through January 2, 2017 is $222,500.

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Chapter 15 Solutions

Principles of Financial Accounting.

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