FINANCIAL ACCT.FUND.(LOOSELEAF)
FINANCIAL ACCT.FUND.(LOOSELEAF)
7th Edition
ISBN: 9781260482867
Author: Wild
Publisher: MCG
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Chapter C, Problem 2PSA

1.

To determine

Financial statement analysis:

The company and its users use financial analysis as a way to analyze the company’s financial statements to make investment and business decisions. There are four financial statements that any company should produce for its users for analysis. These are the income statement, balance sheet, cash flow statement and stockholders’ equity statement.

To prepare: Journal entry to record all transactions and year-end fair value adjustment.

1.

Expert Solution
Check Mark

Explanation of Solution

Journal entries are prepared as follows:

    Date Account title and explanation Debit ($)Credit ($)
    Year 1
    Jan. 20Debt investment − AFS20,500
    Cash 20,500
    (to record the purchase of bond)
    Feb. 9Debt investment − AFS55,440
    Cash 55,440
    (to record the purchase of bond)
    June 12Debt investment - AFS40,500
    Cash 40,500
    (to record the purchase of bond)
    Dec. 31Fair value adjustment − AFS3,910
    Unrealized gain − equity 3,910
    (to record the fair value adjustment)
    Year 2
    Apr. 15Cash 23,500
    Gain on sale of debt investment 3,000
    Debt investment - AFS20,500
    (to record the sale of bonds on cash)
    July 5Cash 35,850
    Loss on sale of debt investment 4,650
    Debt investment - AFS40,500
    (to record the sale of bonds on cash)
    July 22Debt investment − AFS13,500
    Cash 13,500
    (to record the purchase of notes)
    Aug. 19Debt investment − AFS15,300
    Cash 15,300
    (to record the purchase of bonds)
    Dec. 31Fair value adjustment − AFS1,175
    Unrealized gain − equity 1,175
    (to record the fair value adjustment)
    Year 3
    Feb. 27Debt investment − AFS160,800
    Cash 160,800
    (to record the purchase of bond)
    June 21Cash 57,600
    Gain on sale of debt investment2,160
    Debt investment − AFS55,440
    (to record the sale of bonds on cash)
    June 30Debt investment − AFS 50,400
    Cash 50,400
    (to record the purchase of bonds)
    Aug. 3Cash 9,750
    Loss on sale of debt investment 3,750
    Debt investment − AFS13,500
    (to record the sale of bonds)
    Nov. 1Cash 20,475
    Gain on sale of debt investment 5,175
    Debt investment − AFS15,300
    (to record the sale of bonds)
    Dec. 31Unrealized gain − equity 3,085
    Fair value adjustment - AFS3,085
    (to record the fair value adjustment)

Working notes:

Year 1

    Company Cost ($)Fair value ($)Difference ($)
    J J20,50021,5001,000
    S55,44052,500(2,940)
    M40,50046,3505,850
    Total 116,440120,3503,910

Year 2

    Company Cost ($)Fair value ($)Difference ($)
    K15,30017,3252,025
    S13,50012,000(1,500)
    S55,44060,0004,560
    Total 84,24089,3255,085
    Fair value adjustment account:
    Required balance$5,085
    Existence balance ($3,910)
    Required change $1,175

Year 3

    Company Cost ($)Fair value ($)Difference ($)
    B & D50,40054,6004,200
    M160,800158,600(2,200)
    Total 211,200213,2002,000
    Fair value adjustment account:
    Required balance$5,085
    Existence balance ($2,000)
    Required change $3,085

2.

To determine

Financial statement analysis:

The company and its users use financial analysis as a way to analyze the company’s financial statements to make investment and business decisions. There are four financial statements that any company should produce for its users for analysis. These are the income statement, balance sheet, cash flow statement and stockholders’ equity statement.

To prepare: Table showing (a) total cost (b) total fair value adjustment (c) total fair value of portfolio.

2.

Expert Solution
Check Mark

Explanation of Solution

The table is prepared as follows:

    RequirementDebt investment Year 1 ($)Year 2 ($)Year 3 ($)
    (a)Long term AFS securities (cost)116,44084,240211,200
    (b)Fair value adjustment − AFS3,9105,0852,000
    (c)Long term AFS security (fair value)120,35089,325213,200

3.

To determine

Financial statement analysis:

The company and its users use financial analysis as a way to analyze the company’s financial statements to make investment and business decisions. There are four financial statements that any company should produce for its users for analysis. These are the income statement, balance sheet, cash flow statement and stockholders’ equity statement.

To prepare:Table showing (a) realized gains or losses and (b) unrealized gains or losses.

3.

Expert Solution
Check Mark

Explanation of Solution

The table showing realized and unrealized gain or losses are prepared as follows:

    Particular Year 1 ($)Year 2 ($)Year 3 ($)
    Realized gain or (losses)
    Sale of J J3,000
    Sale of M(4,650)
    Sale of S2,160
    Sale of S L(3,750)
    Sale of K5,175
    Total realized gain or (losses)0(1,650)3,585
    Unrealized gains or (losses)3,9105,0852,000

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