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1.
Prepare the journal entries to record the given transactions.
1.
Explanation of Solution
Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Prepare the journal entries to record the given transactions as follows:
| Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
| February 6, | Stock Investments in company N (1) | 139,400 | ||
| Cash | 139,400 | |||
| (To record the Purchase of 3,400 shares of Company N in cash) | ||||
| April 7, | Stock Investments in Company D (2) | 46,800 | ||
| Cash | 46,800 | |||
| (To record 1,200 shares of company D purchased in cash) | ||||
| June 2, | Stock Investments in company M (3) | 180,000 | ||
| Cash | 180,000 | |||
| (To record 2,500 shares of Company M purchased in cash) | ||||
| June 30, | Cash | 3,400 | ||
| Dividend revenue (4) | 3,400 | |||
| (To record dividend revenue received from Company N) | ||||
| August 11, | Cash (5) | 39,100 | ||
| Stock Investments in Company N (7) | 4,250 | |||
| Gain on Sale of Stock Investments (6) | 34,850 | |||
| (To record sales made 850 shares at the rate of $46 per share) | ||||
| August 24, | Cash | 120 | ||
| Dividend Revenue (8) | 120 | |||
| (To record dividend revenue received from Company D in cash) | ||||
| November 9, | Cash | 3,825 | ||
| Dividend Revenue (9) | 3,825 | |||
| (To record dividend revenue received from Company N in cash) | ||||
| December 18, | Cash | 180 | ||
| Dividend Revenue (10) | 180 | |||
| (To record dividend revenue received from Company D in cash) |
Table (1)
Working note:
Calculate the purchased value of stock investment (Company N)
Calculate the purchased value of stock investment (Company D)
Calculate the purchased value of stock investment (Company M)
Calculate the dividend revenue received from Company N
Calculate the value of cash received from the sale of stock investment (Company N stocks)
Calculate the purchase value of long-term investment for 850 shares of Company N
Calculate the gain (loss) from sale of stock investment.
Calculate the dividend revenue received from Company D
Calculate the dividend revenue received from Company N
Calculate the dividend revenue received from Company D
2.
Prepare a table to compare the year-end cost and fair value of Company S’s stock investments in available-for sale securities.
2.
Explanation of Solution
Prepare a table to compare the year-end cost and fair value of Company S’s stock investments in available-for sale securities as follows:
| Name of the company | Cost of stock investment | Fair value of stock investment | Unrealized gain or (loss) |
| Company N | $104,550 (12) | $102,000 (13) | |
| Company D | $46,800 (2) | $49,200 (14) | |
| Company M | $180,000 (3) | $147,500 (15) | |
| Totals | $331,350 | $298,700 | $(32,650) (16) |
Table (2)
Working note:
Calculate the cost of investment – Company N
Calculate the fair value of stock investment of Company N
Calculate the fair value of stock investment of Company F
Calculate the fair value of stock investment of Company M
Calculate the value of unrealized gain or loss
3.
Prepare an adjusting entry, if necessary, to record the year-end fair value adjustment for the portfolio of stock investments in available-for-sale securities.
3.
Explanation of Solution
Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle. The purpose of adjusting entries is to adjust the revenue, and expenses during the period in which they actually occurs.
Prepare an adjusting entry, if necessary, to record the year-end fair value adjustment for the portfolio of stock investments in available-for-sale securities as follows:
Adjusting entry for unrealized loss:
| Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
| December, 31 | Unrealized loss - Equity | 32,650 | ||
| Fair value adjustment | 32,650 | |||
| (To record the adjustment entry for unrealized loss at the end of the accounting year ) |
Table (3)
- Unrealized Loss–Equity is an adjustment account to report the investment at fair market value. Since loss has occurred while adjusting; therefore, debit the unrealized Gain or Loss–Equity account with $32,650.
- Fair Value Adjustment is a contra-asset account. The account shows a credit balance since the market price has decreased (loss); therefore, credit the fair value adjustment with $32,650.
4.
Explain the manner in which the fair value adjustment of Company S’s stock investment is presented in the balance sheet.
4.
Explanation of Solution
Explain the manner in which the fair value adjustment of Company S’s stock investment is presented in the balance sheet as follows:
Cost of stock investment in available-for-sale securities of $331,350 is reported in the assets side of the balance sheet and unrealized loss of $32,650 is subtracted from the cost of investment for the fair value adjustment. Net fair value of $298,700
5.
Explain the manner in which the stock investments affect Company S’s
- a. Income statement for the year , and
- b. The equity section of the balance sheet at year ended.
5.
Explanation of Solution
Explain the manner in which the stock investments affect Company S’s income statement for the year, and the equity section of the balance sheet at year ended as follows:
(a) Income statement:
- Unrealized Loss-Interest Revenue, $32,650
- Dividend Revenue, $7,525 (17)
- Gain on Sale of Stock Investments, $4,250
- Net effect on income is $20,875
(b) Equity section of Balance sheet
- Decrease to equity from the $20,875 decrease in income.
Working note:
Calculate the value of total dividend revenue received:
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