Chapter C, Problem 1PSB

To determine

Journal Entry:

Journal is the primary record of the business transaction in chronological (date wise) order. Journal Entry contains two effects one is debit and other is credit, under double entry book keeping system.

Adjusting Entries:

Adjusting entries are made at the end of the year to adjust the financial position of the enterprise according to accrual basis of accounting.

To prepare: Journal entries to record the transactions.

Explanation of Solution

For the year 2017,

To record purchase of 2,400 shares of Aat $59.15 per share plus $1,545 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
March10,2017	Short term investment Trading securities		142,505
	Cash			142,505
	(Being short term investment purchase against cash)

Table(1)

• The short term investment of H Company is increase. The short term investment is the asset of the company and the current asset of H Company also increases.
• The cash account is decrease by $142,505, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 5,000 shares of Mat $36.25 per share plus $2,855 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
May 7,2017	Short term investment Trading securities		184,105
	Cash			184,105
	(Being short term investment purchase against cash)

Table(2)

• The short term investment of H Company is increase. The short term investment is the asset of the company and the current asset of H Company also increases.
• The cash account is decrease by $184,105, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 1,200 shares of Uat $57.25 per share plus $1,250 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Sep 1,2017	Short term investment Trading securities		69,950
	Cash			69,950
	(Being short term investment purchase against cash)

Table(3)

• The short term investment of H Company is increase. The short term investment is the asset of the company and the current asset of H Company also increases.
• The cash account is decrease by $69,950, and the credit of cash means that the current asset of the company also decreases.

To record the unrealized gain earn on December 31, 2017.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31, 2017	Fair value adjustment Short term investment		16,560
	Unrealized gain-Income			16,560
	(Being unrealized gain earned of $16,560 at the time of closing)

Table(4)

• The fair value of short term investment is $380,000 and the cost of share is $ 396,560 so the H Company earns an unrealized gain of $16,560, and unrealized gain increases the balance of income.
• The fair value adjustment account is an adjustment account to account for the unrealized gain earned by H Company.

For the year 2018,

To record sale of 5,000 share of M at $34.50 and commission is $2,050.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
April 26, 2018	Cash		170,450
	Loss on sale of short term investment		13,655
	Short term investment			184,105
	(Being short term investment sold at a loss of $13,655 and receive cash )

Table(5)

• Cash receive at the time of sale of investment it increases the cash balance and the asset of the company also increases.
• By the sale of short term investment, the short term investment account decreases and the asset of the company also decreases with $184,105 amount.
• At the time of sale H Company receives the loss on sale of investment and this loss is debited to the loss on sale of short term investment account.

To record sale of 1,200 share of U Company at $60.50 and commission is $1,788.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
April 27, 2018	Cash		70,812
	Gain on sale of short term investment			862
	Short term investment			69,950
	(Being short term investment sold at a gain of $1,990 and receive cash )

Table(6)

• Cash receive at the time of sale of investment it increases the cash balance and the asset of the company also increases.
• By the sale of short term investment, the short term investment account decreases and the asset of the company also decreases with $69,950 amount.
• At the time of sale H Company receives the gain on sale of investment and this gain is credited to the gain on sale of short term investment account.

To record purchase of 3,600 shares of S at $172 per share plus $3,250 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
June 2,2018	Short term investment Trading securities		622,450
	Cash			622,450
	(Being short term investment purchase against cash)

Table(7)

• The short term investment of H Company is increase. The short term investment is the asset of the company and the current asset of H Company also increases.
• The cash account is decrease by $622,450, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 900 shares of W Martat $50.25 per share plus $1,082 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
June 14, 2018	Short term investment Trading securities		46,307
	Cash			46,307
	(Being short term investment purchase against cash)

Table(8)

• The short term investment of H Company is increase. The short term investment is the asset of the company and the current asset of H Company also increases.
• The cash account is decrease by $46,307, and the credit of cash means that the current asset of the company also decreases.

To record the unrealized loss occurs on December 31, 2018.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31, 2018	Unrealized loss- Income		16,738
	Fair value adjustment Short term investment			16,738
	(Being unrealized loss suffered of $16,738 at the time of closing)

Table(9)

• The fair value of short term investment is $828,000 and the cost of share is $ 811,262 so the H Company suffers an unrealized loss of $16,738, and unrealized loss reduces the balance of equity account.
• The fair value adjustment account is an adjustment account to account for the unrealized loss suffers by H Company.

For the year 2019,

To record purchase of 2,000 shares of P Companyat $43 per share plus $2,890 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan 28, 2019	Short term investment Trading securities		88,890
	Cash			88,890
	(Being short term investment purchase against cash)

Table(10)

• The short term investment of H Company is increase. The short term investment is the asset of the company and the current asset of H Company also increases.
• The cash account is decrease by $88,890, and the credit of cash means that the current asset of the company also decreases.

To record sale of 3,600 share of S at $172 and commission is $3,250.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan 31, 2019	Cash		602,760
	Loss on sale of short term investment		19,690
	Short term investment			622,450
	(Being short term investment sold at a loss of $13,655 and receive cash )

Table(11)

• Cash receive at the time of sale of investment it increases the cash balance and the asset of the company also increases.
• By the sale of short term investment, the short term investment account decreases and the asset of the company also decreases with $622,450 amount.
• At the time of sale H Company receives the loss on sale of investment and this loss is debited to the loss on sale of short term investment account.

To record sale of 2,400 share of A at $56.75 and commission is $2,480.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
August 22, 2019	Cash		133,720
	Loss on sale of short term Investment		8785
	Short term investment			142,505
	(Being short term investment sold at a loss of $13,655 and receive cash )

Table(12)

• Cash receive at the time of sale of investment it increases the cash balance and the asset of the company also increases.
• By the sale of short term investment, the short term investment account decreases and the asset of the company also decreases with $142,505 amount.
• At the time of sale H Company receives the loss on sale of investment and this loss is debited to the loss on sale of short term investment account.

To record purchase of 1,500 shares of V Companyat $40.50 per share plus $1,680 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Sep 3,2019	Short term investment Trading securities		62,430
	Cash			62,430
	(Being short term investment purchase against cash)

Table(13)

• The short term investment of H Company is increase. The short term investment is the asset of the company and the current asset of H Company also increases.
• The cash account is decrease by $62,430, and the credit of cash means that the current asset of the company also decreases.

To record sale of 900 share of W Mart at $53.75 and commission is $1,220.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
April 27, 2019	Cash		47,155
	Gain on sale of short term Investment			848
	Short term investment			46,307
	(Being short term investment sold at a gain of $1,990 and receive cash )

Table(14)

• Cash receive at the time of sale of investment it increases the cash balance and the asset of the company also increases.
• By the sale of short term investment, the short term investment account decreases and the asset of the company also decreases with $69,950 amount.
• At the time of sale H Company receives the gain on sale of investment and this gain is credited to the gain on sale of short term investment account.

To record the unrealized gain earn on December 31, 2019.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 31, 2019	Fair value adjustment Short term investment		11,320
	Unrealized gain-Income			11,320
	(Being unrealized gain earned of $11,320 at the time of closing)

Table(15)

• The fair value of short term investment is $140,000 and the cost of share is $ 151,320 so the H Company earns an unrealized gain of $11,320, and unrealized gain increases the balance of income.
• The fair value adjustment account is an adjustment account to account for the unrealized gain earned by H Company.

Working notes:

Calculation of the value of purchase price of shares, purchase from A,

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(2,400\times \$59.15\right)+\$1,545\\ =\$141,960+\$1,545\\ =\$142,505\end{array}$

Calculation of the value of purchase price of shares, purchase from M,

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(5,000\times \$36.25\right)+\$2,855\\ =\$181,250+\$2,855\\ =\$184,105\end{array}$

Calculation of the value of purchase price of shares, purchase from U,

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,200\times \$57.25\right)+\$1,250\\ =\$68,700+\$1,250\\ =\$69,950\end{array}$

Calculation of fair value adjustment as on December 31, 2017,

$\begin{array}{c}\text{Fair value adjustment}=\mathrm{Cos}\text{t of share}-\text{Fair Value}\\ =\left(\$142,505+\$184,105+\$69,950\right)-\$380,000\\ =\$396,560-\$380,000\\ =\$165,60\end{array}$

Calculation of sale price of M shares,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(5,000\times \$34.50\right)-\$2,050\\ =\$172,500-\$2,050\\ =\$170,450\end{array}$

Calculation of loss in the sale of investment of M shares,

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale Price}\\ =\$184,105-\$170,450\\ =\$13,655\end{array}$

Calculation of sale price of U shares,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(1,200\times \$60.50\right)-\$1,788\\ =\$72,600-\$1,788\\ =\$70,812\end{array}$

Calculation of Gain in the sale of investment of F Company,

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$70,812-\$69,950\\ =\$862\end{array}$

Calculation of the value of purchase price of shares, purchase from S,

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(3,600\times \$172\right)+\$3,250\\ =\$619,200+\$3,250\\ =\$622,450\end{array}$

Calculation of the value of purchase price of shares, purchase from W Mart,

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(900\times \$50.25\right)+\$1,082\\ =\$45,225+\$1,082\\ =\$46,307\end{array}$

Calculation of fair value adjustment as on December 31, 2018,

$\begin{array}{c}\text{Fair value adjustment}=\text{Fair Value}-\mathrm{Cos}\text{t of share}\\ =\$828,000-\left(\begin{array}{l}\$396,560-\$184,105-\$69,950\\ +\$622,450+\$46,307\end{array}\right)\\ =\$828,000-\$811,262\\ =\$16,738\end{array}$

Calculation of the value of purchase price of shares, purchase from P Company,

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(2,000\times \$43\right)+\$2,890\\ =\$86,000+\$2,890\\ =\$88,890\end{array}$

Calculation of sale price of S shares,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(3,600\times \$168\right)-\$2,040\\ =\$604,800-\$2,040\\ =\$602,760\end{array}$

Calculation of loss in the sale of investment of S shares,

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale Price}\\ =\$622,450-\$602,760\\ =\$19,690\end{array}$

Calculation of sale price of A shares,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(2,400\times \$56.75\right)-\$2,480\\ =\$136,200-\$2,480\\ =\$133,720\end{array}$

Calculation of loss in the sale of investment of S shares,

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale Price}\\ =\$142,505-\$133,720\\ =\$8,785\end{array}$

Calculation of the value of purchase price of shares, purchase from V Company,

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,500\times \$40.50\right)+\$1,680\\ =\$60,750+\$1,680\\ =\$62,430\end{array}$

Calculation of sale price of W Mart shares,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(900\times \$53.75\right)-\$1,220\\ =\$48,375-\$1,220\\ =\$47,155\end{array}$

Calculation of Gain in the sale of investment of W mart Company,

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$47,155-\$46,307\\ =\$848\end{array}$

Calculation of fair value adjustment as on December 31, 2019,

$\begin{array}{c}\text{Fair value adjustment}=\mathrm{Cos}\text{t of share}-\text{Fair Value}\\ =\left[\left(\begin{array}{l}\$811,262+\$88,890-\$622,450\\ -\$142,505+\$62,430-\$46,307\end{array}\right)-\$140,000\right]\\ =\$151,320-\$140,000\\ =\$11,320\end{array}$