Financial accounting
Financial accounting
3rd Edition
ISBN: 9780077506902
Author: David J Spieceland Wayne Thomas Don Herrmann
Publisher: Mcgraw-Hill
Question
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Chapter D, Problem D.1BP

(1)

To determine

Investment:

It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

To record: each of these investment transactions.

(1)

Expert Solution
Check Mark

Answer to Problem D.1BP

Prepare the journal entries for each of these transactions.

DateAccount title and explanation

Post

ref.

Debit

$

Credit

$

February 2Investments  52,500 
 Cash   52,500
 (To record the purchase of common stock)   
 
February 4Investments  19,200 
 Cash   19,200
 (To record the purchase of preferred stock)   
 
July 15Cash  16,000 
 Investments  14,000
 Gain (difference amount)  2,000
 (To record the sale of common stock)   
 
November  30Cash  2,290 
 Dividend revenue  2,290
 (To record the dividend revenue)   
 
December 31Unrealized Holding gain (other comprehensive income) 5,600 
 Investments  5,600
 (To record the adjusted fair value of the common and preferred stock)   

Table (1)

Explanation of Solution

Common stocked purchased:

  • Investments are the assets. Purchase of the common stock increases the investments. Thus, investments are debited with $52,500 (1,500shares×$35per share) .
  • Cash is a current asset. Purchase of common stock decreases the cash balance. Thus, cash is credited with $52,500.

Purchase of preferred stock:

  • Investments are the assets. Purchase of the common stock increases the investments. Thus, investments are debited with $19,200 (600shares×$32per share) .
  • Cash is a current asset. Purchase of common stock decreases the cash balance. Thus, cash is credited with $19,200.

Common stock sold @ $40 per share:

  • Cash is a current asset. Sale of common stock increases the cash balance. Thus, cash is debited with $16,000 (400shares×$40per share) .
  • Investments are the assets. Sale of the common stock decreases the investments. Thus, investments are credited with $14,000 (400shares×$35per share) .
  • Gain is a component of owners’ equity. Loss decreases the owners’ equity. Thus, gain is credited with $2,000.

Dividend received:

  • Cash is a current asset. Dividend revenue increases the cash balance. Thus, cash is debited with $2,290 [(1,100shares×$1.1per share)+(600shares×$1.8per share)] .
  • Dividend revenue is a component of owners’ equity. Dividend revenue increases the owners’ equity. Thus, dividend revenue is credited with $2,290.

Fair value adjustment:

  • Investments are the assets. Changes (increase) in the fair value of the common stock and preferred stock increases the investments. Thus, investments are debited with $5,600 [(1,100shares×$(3531)per share)+(600shares×$(3230)per share)] .
  • Unrealized Holding gain is a component of other comprehensive income. It increases the balance of the other comprehensive income. Thus, unrealized Holding gain (other comprehensive income) is credited with $5,600 [$4,400+$1,200] .

(2)

To determine

Investment:

It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

To calculate: the balance in the Investments account as of December 31.

(2)

Expert Solution
Check Mark

Answer to Problem D.1BP

The balance in the investment account as of December 31 is $52,100 ($34,100+$18,000) .

Explanation of Solution

Calculate the balance in the investment account as of December 31.

ParticularsCommon stockPreferred stock
Investments purchased$52,500$19,200
Less: sale of common stock (14,000) 
Less: fair value adjustment(4,400)(1,200)
Investments as of December 3134,10018,000
Number of shares1,100shares600 shares

Table (2)

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