FINANCIAL ACCOUNTING (LL)
FINANCIAL ACCOUNTING (LL)
10th Edition
ISBN: 9781266449512
Author: Libby
Publisher: MCG
Question
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Chapter A, Problem 2P

1.

To determine

Prepare journal entry for interest received on March 31, 2019.

1.

Expert Solution
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Explanation of Solution

Prepare journal entry for interest received on March 31, 2019.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2019    
March31Cash 1,000 
   Interest Revenue  1,000
  (To record receipt of interest)   

Working Note:

Compute amount of interest revenue.

Interest revenue=$80,000×0.05×312=$1,000

2.

To determine

Journalize the entries related to investment in trading securities.

2.

Expert Solution
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Explanation of Solution

Trading securities (TS): The category of passive investments which are bought with a purpose to sell in the near future are referred to as trading securities.  The percentage of passive investments in debt or equity will be less than 20%.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare journal entry for purchase of investment in TS.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2019    
January1Investments in TS 170,000 
     Cash  170,000
  (To record purchase of investment in TS)   

Prepare journal entry for adjusting the cost of TS securities to the fair market value, as on December 31, 2019.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2019    
December31Net Unrealized Gains (Losses) 2,000 
   Investments in TS  2,000
  (To record the adjustment of cost of investment in TS to the fair value)   

Working note:

Determine the unrealized gain or loss on investment on December 31, 2019.

Unrealized gain or (loss)}{Fair value of investment on December 31, 2019 – Book value before adjustment}=$78,000–$80,000=–$2,000

Prepare journal entry for adjusting the TS to the fair market value, as on December 31, 2020.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2020    
December31Investments in TS 9,000 
   Net Unrealized Gains (Losses)  9,000
  (To record the adjustment of investment in TS to the fair value)   

Working note:

Determine the unrealized gain or loss on investment on December 31, 2020.

Unrealized gain or (loss)}{Fair value of investment on December 31, 2020 – Book value before adjustment}=$87,000–$78,000=$9,000

Prepare journal entry for adjusting the TS to the fair market value, as on December 31, 2021.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2021    
December31Net Unrealized Gains (Losses) 6,000 
   Investments in TS  6,000
  (To record the adjustment of investment in TS to the fair value)   

Working note:

Determine the unrealized gain or loss on investment on December 31, 2021.

Unrealized gain or (loss)}{Fair value of investment on December 31, 2021 – Book value before adjustment}=$81,000–$87,000=–$6,000

Prepare journal entry to record the sale of investment in TS securities.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2022    
July14Cash 83,000 
      Net Unrealized Gains (Losses)  2,000
   Investments in TS Securities  81,000
  (To record the disposal of trading  investment)   

Working note:

Determine the unrealized gain or loss on investment on July 14, 2022.

Unrealized gain or (loss)}{Fair value of investment on July 14, 2022 – Book value before adjustment}=$83,000–$81,000=$2,000

2.

To determine

Journalize the entries related to investment in available-for-sale securities.

2.

Expert Solution
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Explanation of Solution

Available-for-sale (AFS) securities: The category of passive investments which are held as idle funds to serve the future operating and strategic purposes, are referred to as available-for-sale securities. The percentage of passive investments in debt or equity will be less than 20%.

Prepare journal entry for purchase of investment in AFS securities.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2019    
January1Investments in AFS Securities 170,000 
     Cash  170,000
  (To record purchase of investment in AFS securities)   

Prepare journal entry for adjusting the cost of AFS securities to the fair market value, as on December 31, 2019.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2019    
December31Net Unrealized Gains (Losses) 2,000 
   Investments in AFS Securities  2,000
  (To record the adjustment of cost of investment in AFS securities to the fair value)   

Determine the unrealized gain or loss on investment on December 31, 2019.

Unrealized gain or (loss)}{Fair value of investment on December 31, 2019 – Book value before adjustment}=$78,000–$80,000=–$2,000

Prepare journal entry for adjusting the AFS securities to the fair market value, as on December 31, 2020.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2020    
December31Investments in AFS Securities 9,000 
   Net Unrealized Gains (Losses)  9,000
  (To record the adjustment of investment in AFS securities to the fair value)   

Working note:

Determine the unrealized gain or loss on investment on December 31, 2020.

Unrealized gain or (loss)}{Fair value of investment on December 31, 2020 – Book value before adjustment}=$87,000–$78,000=$9,000

Prepare journal entry for adjusting the AFS securities to the fair market value, as on December 31, 2021.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2021    
December31Net Unrealized Gains (Losses) 6,000 
   Investments in AFS Securities  6,000
  (To record the adjustment of investment in AFS securities to the fair value)   

Working note:

Determine the unrealized gain or loss on investment on December 31, 2021.

Unrealized gain or (loss)}{Fair value of investment on December 31, 2021 – Book value before adjustment}=$81,000–$87,000=–$6,000

Prepare journal entry to record the sale of investment in available-for-sale securities.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2022    
July14Cash 83,000 
  Net Unrealized Losses  3,000 
     Gain on sale of investments  3,000
   Investments in AFS Securities  83,000
  (To record the disposal of available-for-sale investment)   

Working Notes:

Determine the unrealized gain or loss on investment on July 14, 2022.

Unrealized gain or (loss)}{Fair value of investment on July 14, 2022 – Book value before adjustment}=$83,000–$81,000= $2,000

Compute net balance of unrealized gains (losses).

DetailsAmount ($)
Net unrealized gains (losses) on December 31, 2019(2,000)
Net unrealized gains (losses) on December 31, 20209,000
Net unrealized gains (losses) on December 31, 2021(6,000)
Net unrealized gains (losses) on December 31, 20222,000
Net balance of unrealized gains (losses)3,000

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Chapter A Solutions

FINANCIAL ACCOUNTING (LL)

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