Financial and Managerial Accounting (Looseleaf) (Custom Package)
Financial and Managerial Accounting (Looseleaf) (Custom Package)
6th Edition
ISBN: 9781259754883
Author: Wild
Publisher: MCG
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Chapter C, Problem 3PSA

1.

To determine

To prepare:

The journal entries to record the transactions and any year-end fair value adjustments to the portfolio of long-term available-for-sale securities.

1.

Expert Solution
Check Mark

Answer to Problem 3PSA

Solution:

Prepare the journal entries for the year 2015 as shown below.

Journal entries of G Company
For the year 2015
Date Particulars L/F Debit ($) Credit ($)
Jan 20 Long-term investment - Trading securities   20,740  
  Cash     20,740
  (Being long-term investment purchase against cash)      
Feb 9 Long-term investment - Trading securities   55,665  
  Cash     55,665
  (Being long-term investment purchase against cash)      
June 12 Long-term investment - Trading securities   40,695  
  Cash     40,695
  (Being long-term investment purchase against cash)      
Dec 31 Fair value adjustment – Long-term investment   11,228  
  Unrealized gain     11,228
  (Being unrealized gain earned of $11,228 at the time of closing)      

Table – 1

Explanation of Solution

► The long-term investment of G Company increases. The long-term investment is an asset of the company, so the current asset of the company also increases.

► The cash account decreases by $20,925. So, cash account is credited which means that the current asset of the company also decreases.

► The cash account decreases by $55,665. So, cash account is credited which means that the current asset of the company also decreases.

► The cash account decreases by $40,695. So, cash account is credited which means that the current asset of the company also decreases.

► The fair value adjustment account is an adjustment account recorded as an unrealized gain earned by the company.

► The fair value of the long-term investment is less than the cost of share. So, the company earns an unrealized gain of $11,228, which increases the balance of income.

Now, prepare the journal entries for the year 2016 as shown below.

Journal entries of G Company
For the year 2016
Date Particulars L/F Debit ($) Credit ($)
April 15 Cash   23,248  
  Gain on sale of long-term investment     2,508
  Long-term investment     20,740
  (Being long-term investment sold at a gain of $1,990 and receive cash )      
July 5 Cash   35,615  
  Loss on sale of long-term investment   5,080  
  Long-term investment     40,695
  (Being long-term investment sold at a loss of $599 and receive cash )      
June 22 Long-term investment - Trading securities   13,980  
  Cash     13,980
  (Being long-term investment purchase against cash)      
Aug 19 Long-term investment - Trading securities   15,498  
  Cash     15,498
  (Being long-term investment purchase against cash)      
Dec 31 Fair value adjustment - Long-term investment   21,396  
  Unrealized gain     21,396
  (Being unrealized gain earned of at the time of closing)      

Table - 2

► Cash received at the time of sale of investment increases the cash balance and the value of assets of the company.

► On the sale of short-term investment, the short-term investment account decreases and the asset of the company also decreases by $20,740.

► On the time of sale, C Company earns a gain on the sale of investment. This gain is credited to the gain on sale of long-term investment account.

► On the sale of short-term investment, the long-term investment account decreases and the asset of the company also decreases by $40,695.

► On the time of sale, C Company earns a loss on the sale of investment. This loss is debited to the loss on sale of long-term investment account.

► The long-term investment of G Company increases. The long-term investment is an asset to the company, so the current asset of the company also increases.

► The cash account decreases by $13,980. The credit of the cash account means that the current asset of the company also decreases.

► The cash account decreases by $15,498. The credit of the cash account means that the current asset of the company also decreases.

► The fair value adjustment account is an adjustment account reported as an unrealized gain earned by the company.

► The fair value of long term investment is less than the cost of share. So, the company earns an unrealized gain of $21,396, which increases the balance of income.

Now, prepare the journal entries for the year 2017 as shown below.

Journal entries of G Company
For the year 2017
Date Particulars L/F Debit ($) Credit ($)
Feb 27 Long-term investment - Trading securities   161,325  
  Cash     161,325
  (Being long-term investment purchase against cash)      
June 21 Cash   56,720  
  Gain on sale of long-term investment     1,055
  Long-term investment     55,665
  (Being long-term investment sold at a gain of $1,055 and receive cash )      
June 30 Long-term investment - Trading securities   50,835  
  Cash     50,835
  (Being long-term investment purchase against cash)      
Aug 3 Cash   9,315  
  Loss on sale of long-term investment   4,665  
  Long-term investment     13,980
  (Being long-term investment sold at a loss of $4,665 and receive cash )      
June 21 Cash   19,850  
  Gain on sale of long-term investment     4,352
  Long-term investment     15,498
  (Being long-term investment sold at a gain of $4,352 and receive cash )      
Dec 31 Unrealized loss - Income   462  
  Fair value adjustment – Short-term investment     462
  (Being unrealized loss suffered of $462 at the time of closing)      

Table - 3

► The long-term investment of G Company increases. The long-term investment is an asset to the company, so the current asset of the company also increases.

► The cash account decreases by $161,325. The credit of the cash account means that the current asset of the company also decreases.

► Cash received at the time of sale of investment increases the cash balance and the value of assets of the company.

► On the sale of short-term investment, the short-term investment account decreases and the asset of the company also decreases by $55,665.

► On the time of sale, C Company earns a gain on the sale of investment. This gain is credited to the gain on sale of long-term investment account.

► The cash account decreases by $50,835. The credit of the cash account means that the current asset of the company also decreases.

► On the sale of short-term investment, the short-term investment account decreases and the asset of the company also decreases by $13,980.

► On the time of sale, C Company suffers a loss on the sale of investment. This loss is debited to the loss on sale of long-term investment account.

► On the sale of short-term investment, the long-term investment account decreases and the asset of the company also decreases by $55,665.

► The fair value of short-term investment is $220,200 and the cost of share is $219,738. So, the company suffers an unrealized loss of $462, which reduces the balance of equity account.

► The fair value adjustment account is an adjustment account recorded as an unrealized loss suffered by the company.

Working notes:

1. Calculation of the value of purchase price of shares of J Company.

Purchase price of shares=(Number of shares×share price)+Commision=(1,000×$20.50)+$240=$20,500+$240=$20,740

2. Calculation of the value of purchase price of shares of S Company.

Purchase price of shares=(Number of shares×share price)+Commision=(1,200×$46.20)+$225=$55,440+$225=$55,665

3. Calculation of the value of purchase price of shares of M Company.

Purchase price of shares=(Number of shares×share price)+Commision=(1,500×$27)+$195=$40,500+$195=$406,95

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

Fair value adjustment=Cost of share(Fair Value×Share)=[($20,925+5,825+97,928)(1,000×21.50+1,200×38+1,500×30.90)]=$124,678($21,500+$45,600+$46,350)=$124,678$113,450=$11,228

5. Calculation of sale price of shares of J Company.

Sale price of shares=(Number of shares×share price)Broker fee=(1,000×$23.50)$525=$23,500$525=$23,248

6. Calculation of Gain in the sale of investment of J Company.

Gain=Sale PriceCost of short term investment=$23,248$20,740=$2,508

7. Calculation of sale price of shares of J Company.

Sale price of shares=(Number of shares×share price)Broker fee=(1,500×$23.90)$235=$35,850$235=$35,615

8. Calculation of loss in the sale of investment of H Company.

Loss=Cost of short term investmentSale price=$40,695$35,615=$5,080

9. Calculation of the value of purchase price of shares of S.L Company.

Purchase price of shares=(Number of shares×share price)+Commision=(600×$22.50)+$480=$13,500+$480=$13,980

10. Calculation of the value of purchase price of shares of E.K Company.

Purchase price of shares=(Number of shares×share price)+Commision=(900×$17)+$198=$15,300+$198=$15,498

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

Fair value adjustment=Cost of share(Fair Value×Share)=[($124,678$20,740$40,695+$13,980+$15,498)(900×$19.25+600×$20+1,200×$35)]=$92,721($17,325+$12,000+$42,000)=$92,721$71,325=$21,396

12. Calculation of the value of purchase price of shares of Mi Company.

Purchase price of shares=(Number of shares×share price)+Commision=(2,400×$67)+$525=$160,800+$525=$161,325

13. Calculation of sale price of shares of S Company.

Sale price of shares=(Number of shares×share price)Broker fee=(1,200×$48)$880=$57,600$880=$56,720

14. Calculation of gain in the sale of investment of S Company.

Gain=Sale PriceCost of short term investment=$56,720$55,665=$1,055

15. Calculation of the value of purchase price of shares of B&D Company.

Purchase price of shares=(Number of shares×share price)+Commision=(1,400×$36)+$435=$50,400+$435=$50,835

16. Calculation of sale price of shares of S.L Company.

Sale price of shares=(Number of shares×share price)Broker fee=(600×$16.25)$435=$9,750$435=$9,315

17. Calculation of loss in the sale of investment of S.L Company.

Loss=Cost of short term investmentSale price=$13,980$9,315=$4,665

18. Calculation of sale price of shares of E.K Company.

Sale price of shares=(Number of shares×share price)Broker fee=(900×$22.75)$625=$20,475$625=$19,850

19. Calculation of gain in the sale of investment of E.K Company.

Gain=Sale PriceCost of short term investment=$19,850$15,498=$4,352

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

Fair value adjustment=(Fair Value×Share)Cost of share=[(1,400×$39+2,400×$69)($92,721+$161,325$55,665+$50,835$13,980$15,498)]=[($54,600+$165,600)$219,738]=$220,200$219,738=$462

2.

(a)

To determine

To prepare:

A table summarizing the total cost for the years 2015, 2016, and 2017.

2.

(a)

Expert Solution
Check Mark

Explanation of Solution

Prepare the table summarizing the total cost as shown below.

Year Company Cost of security ($)
2015 J 20,740
  S 55,665
  M 40,695
     
2016 S.L 13,980
  E.K 15,498
  S 55,665
     
2017 Mi 161,325
  B&D 50,835
     

Table – 4

(b)

To determine

To prepare:

A table summarizing the total fair value adjustment for the years 2015, 2016, and 2017.

(b)

Expert Solution
Check Mark

Explanation of Solution

Prepare the table summarizing the total fair value adjustment as shown below.

Year Company Fair value ($)
2015 J 21,500
  S 45,600
  M 46,350
     
2016 S.L 12,000
  E.K 17,325
  S 42,000
     
2017 Mi 165,600
  B&D 54,600
     

Table - 5

(c)

To determine

To prepare:

A table summarizing the total fair value for the portfolio of long-term available-for-sale securities for the years 2015, 2016, and 2017.

(c)

Expert Solution
Check Mark

Explanation of Solution

Prepare the table summarizing the total fair value as shown below.

Year Cost value ($) (A) Fair value ($) (B) Fair value adjustment ($)(AB)
2015 124,678 113,450 11,228
2016 92,721 71,325 21,396
2017 219,738 220,200 (462)

Table – 6

Conclusion

Hence, the required tables for (a), (b), and (c) are prepared as above.

3.

(a)

To determine

To prepare:

A table summarizing the realized gain or loss.

3.

(a)

Expert Solution
Check Mark

Explanation of Solution

Prepare the table summarizing the realized gain or loss as shown below.

Particulars Sale proceeds ($) (A) Cost ($) (B) Gain/loss ($) (AB)
1,000 shares of J
Company
23,248 20,740 2,508
1,500 shares of
M Company
35,615 40,695 (5,080)
1,200 shares of
S Company
56,720 55,665 1,055
600 shares of
S.L Company
9,315 13,980 (4,665)
900 shares of
E.K Company
19,850 15,498 4,352
      (1,830)

Table – 7

Therefore, the total amount of loss worth $1,830 is to be reported in the income statement.

(b)

To determine

To prepare:

A table summarizing the unrealized gain or loss from the portfolio of long-term investment.

(b)

Expert Solution
Check Mark

Explanation of Solution

Prepare the table summarizing the unrealized gain or loss as shown below.

Company Fair value ($) (A) Cost of security ($) (B) Unrealized gain/loss ($) (AB)
J 20,740 21,500 (760)
S 55,665 45,600 10,065
M 40,695 46,350 (5,655)
S.L 13,980 12,000 (1,980)
E.K 15,498 17,325 (1,827)
Mi 165,600 161,325 4,275
B&D 54,600 50,835 3,765
      7,883

Table - 8

Therefore, the total unrealized gain is $7,883.

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Chapter C Solutions

Financial and Managerial Accounting (Looseleaf) (Custom Package)

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