Various transactions relating to trading securities and equity investments • LO12-1, LO12-3, LO12-5 American Surety and Fidelity buys and sells securities expecting to earn profits on short-term differences in price. For the first 11 months of 2018, gains from selling trading securities totaled $8 million, losses were $11 million, and the company had earned $5 million in investment revenue. The following selected transactions relate to American’s trading account and equity securities investment account during December 2018, and the first week of 2019. The company’s fiscal year ends on December 31. No trading securities were held by American on December 1, 2018. 2018 Dec. 12 Purchased FF&G Corporation bonds for $12 million. 13 Purchased 2 million Ferry Intercommunications common shares for $22 million. 15 Sold the FF&G Corporation bonds for $12.1 million. 22 Purchased U.S. Treasury bills for $56 million and Treasury bonds for $65 million. 23 Sold half the Ferry Intercommunications common shares for $10 million. 26 Sold the U.S. Treasury bills for $57 million. 27 Sold the Treasury bonds for $63 million. 28 Received cash dividends of $200,000 from the Ferry Intercommunications common shares. 31 Recorded any necessary adjusting entry (s) and closing entries relating to the investments. The market price of the Ferry Intercommunications stock was $10 per share. 2019 Jan. 2 Sold the remaining Ferry Intercommunications common shares for $10.2 million. 5 Purchased Warehouse Designs Corporation bonds for $34 million. Required: 1. Prepare the appropriate journal entry for each transaction or event during 2018. 2. Indicate any amounts that American would report in its 2018 balance sheet and income statement as a result of these investments. 3. Prepare the appropriate journal entry for each transaction or event during 2019.

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Answer 1

Textbook Question

Chapter 12, Problem 12.8P

Various transactions relating to trading securities and equity investments

• LO12-1, LO12-3, LO12-5

American Surety and Fidelity buys and sells securities expecting to earn profits on short-term differences in price. For the first 11 months of 2018, gains from selling trading securities totaled $8 million, losses were $11 million, and the company had earned $5 million in investment revenue. The following selected transactions relate to American’s trading account and equity securities investment account during December 2018, and the first week of 2019. The company’s fiscal year ends on December 31. No trading securities were held by American on December 1, 2018.

2018
Dec. 12	Purchased FF&G Corporation bonds for $12 million.
13	Purchased 2 million Ferry Intercommunications common shares for $22 million.
15	Sold the FF&G Corporation bonds for $12.1 million.
22	Purchased U.S. Treasury bills for $56 million and Treasury bonds for $65 million.
23	Sold half the Ferry Intercommunications common shares for $10 million.
26	Sold the U.S. Treasury bills for $57 million.
27	Sold the Treasury bonds for $63 million.
28	Received cash dividends of $200,000 from the Ferry Intercommunications common shares.
31	Recorded any necessary adjusting entry(s) and closing entries relating to the investments. The market price of the Ferry Intercommunications stock was $10 per share.
2019
Jan. 2	Sold the remaining Ferry Intercommunications common shares for $10.2 million.
5	Purchased Warehouse Designs Corporation bonds for $34 million.

Required:

1. Prepare the appropriate journal entry for each transaction or event during 2018.

2. Indicate any amounts that American would report in its 2018 balance sheet and income statement as a result of these investments.

3. Prepare the appropriate journal entry for each transaction or event during 2019.

1.

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.

Equity investments: The financial instruments which claim ownership in the issuing company and pay a dividend revenue to the investor company, are referred to as equity securities. The investments in equity securities are referred to as equity investments.

Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Expert Solution

To determine

To Journalize: Each transaction or event during 2018.

Explanation of Solution

Purchased the bonds of Company FF on December 12, 2018:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.12.18	Investment in bonds of Company FF	$12,000,000
	Cash		$12,000,000
	(To record the investment made in Company FF)

Table (1)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Purchased the shares of Company FI on December 13, 2018:

Prepare the journal entry to record the investment made in Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.13.18	Investment in shares of Company FI	$22,000,000
	Cash		$22,000,000
	(To record the investment made in Company FI)

Table (2)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the bonds of Company FF on December 15, 2018:

Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Fair value adjustment (1)	$100,000
	Unrealized holding gain—NI		$100,000
	(To record the gain on adjustment)

Table (3)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 15, 2018.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 12, 2018	12,000,000
Adjustment needed to update fair value (Balancing figure) (1)	100,000
Fair value adjustment balance needed on December 15, 2018	12,100,000

Table (4)

(1)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Cash	$12,100,000
	Investment in bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (5)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the Treasury Bonds and Bills on December 22, 2018:

Prepare the journal entry to record the investment made in Treasury Bills and Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.22.18	Investment in Treasury Bills	$56,000,000
	Investment in Treasury Bonds	$65,000,000
	Cash		$121,000,000
	(To record the investment made )

Table (6)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the half of the shares of Company FI on December 23, 2018:

Prepare the journal entry to record the loss from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.18	Unrealized holding loss—NI	$1,000,000
	Fair value adjustment (2)		$1,000,000
	(To record the loss through adjustment)

Table (7)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized loss as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2018	11,000,000
Adjustment needed to update fair value (Balancing figure) (2)	1,000,000
Fair value adjustment balance needed on December 23, 2018	10,100,000

Table (8)

(2)

Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.18	Cash	$1,000,000
	Fair value adjustment	$100,000
	Investment in bonds of Company FI		$1,100,000
	(To record the sale of investment)

Table (9)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bills on December 26, 2018:

Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.18	Fair value adjustment (3)	$1,000,000
	Unrealized holding gain—NI		$1,000,000
	(To record the gain on adjustment)

Table (10)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 26, 2018.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2018	56,000,000
Adjustment needed to update fair value (Balancing figure) (3)	1,000,000
Fair value adjustment balance needed on December 16, 2018	57,000,000

Table (11)

(3)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.18	Cash	$57,000,000
	Investment in Treasury Bills		$56,000,000
	Fair value adjustment		$1,000,000
	(To record the sale of Treasury Bills)

Table (12)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in Treasury Bills is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bonds on December 27, 2018:

Prepare the journal entry to record the loss from the Treasury Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.27.18	Unrealized holding loss—NI	$2,000,000
	Fair value adjustment (4)		$2,000,000
	(To record the loss through adjustment)

Table (13)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2018	65,000,000
Adjustment needed to update fair value (Balancing figure) (4)	2,000,000
Fair value adjustment balance needed on December 27, 2018	63,000,000

Table (14)

(4)

Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.27.18	Cash	$63,000,000
	Fair value adjustment	$2,000,000
	Investment in Treasury Bonds		$65,000,000
	(To record the sale of Treasury Bonds)

Table (15)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
Investment in Treasury Bonds is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Record the dividends received from the shares of Company FI on December 28, 2018:

Prepare the journal entry to record the dividends received from Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.28.18	Cash	$200,000
	Dividend Revenue		$200,000
	(To record the dividends received from the shares of Company FI)

Table (16)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Record the adjusting entry for the shares of Company FI on December 31, 2018:

Prepare the adjusting entry to record the fall in the price of shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.31.18	Unrealized holding loss—NI (5)	$1,000,000
	Fair value adjustment		$1,000,000
	(To record the loss through adjustment)

Table (17)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized holding loss.

Unrealized holding loss = (Number of shares × Cost per share)−Cost price of shares=(1,000,000×$10)−($22,000,000×12)=$10,000,000−$11,000,000=(−)$1,000,000 (5)

2.

Expert Solution

To determine

To Prepare: The Income statement and Balance sheet of Company ASF for the year 2018.

Explanation of Solution

Explanation

Balance Sheet: Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet of Company AFS for the year ending 2018.

Company AFS
Balance Sheet
December 31, 2018
Particulars	Amount ($)	Amount ($)
Assets
Short term Investments
Equity Investments	$11,000,000
Less- Fair value adjustment	$1,000,000
Total Short term Investments		$10,000,000

Table (18)

The balance sheet of Company AFS shall show the short term investments of $10,000,000.

Income statement: Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Prepare the income statement of Company AFS for the year ending 2018.

Company AFS
Income Statement
For the year ended December 31 , 2018
Particulars	Amount ($)	Amount ($)
Investment revenue	$5,200,000
Gain on sale of investments	$9,100,000
Loss on sale of investments	(-) $14,000,000
Unrealized holding loss on investments	(-) $1,000,000

Table (19)

The above elements shall be shown in the income statement of Company AFS.

Sold the remaining shares of Company FI on January 2, 2019:

Prepare the journal entry to record the gain from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
01.02.19	Fair value adjustment (6)	$200,000
	Unrealized holding gain—NI		$200,000
	(To record the gain on adjustment)

Table (20)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on January 2, 2019.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on January 2, 2019, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2018	11,000,000
Adjustment needed to update fair value (Balancing figure) (6)	800,000
Fair value adjustment balance needed on December 15, 2018	10,200,000

Table (21)

(6)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Cash	$12,100,000
	Investment in bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (22)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in shares of Company FI is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the bonds of Company W on January 5, 2019:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
01.05.19	Investment in bonds of Company W	$34,000,000
	Cash		$34,000,000
	(To record the investment made in Company W)

Table (23)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

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Answer 2

Textbook Question

Chapter 12, Problem 12.8P

Various transactions relating to trading securities and equity investments

• LO12-1, LO12-3, LO12-5

American Surety and Fidelity buys and sells securities expecting to earn profits on short-term differences in price. For the first 11 months of 2018, gains from selling trading securities totaled $8 million, losses were $11 million, and the company had earned $5 million in investment revenue. The following selected transactions relate to American’s trading account and equity securities investment account during December 2018, and the first week of 2019. The company’s fiscal year ends on December 31. No trading securities were held by American on December 1, 2018.

2018
Dec. 12	Purchased FF&G Corporation bonds for $12 million.
13	Purchased 2 million Ferry Intercommunications common shares for $22 million.
15	Sold the FF&G Corporation bonds for $12.1 million.
22	Purchased U.S. Treasury bills for $56 million and Treasury bonds for $65 million.
23	Sold half the Ferry Intercommunications common shares for $10 million.
26	Sold the U.S. Treasury bills for $57 million.
27	Sold the Treasury bonds for $63 million.
28	Received cash dividends of $200,000 from the Ferry Intercommunications common shares.
31	Recorded any necessary adjusting entry(s) and closing entries relating to the investments. The market price of the Ferry Intercommunications stock was $10 per share.
2019
Jan. 2	Sold the remaining Ferry Intercommunications common shares for $10.2 million.
5	Purchased Warehouse Designs Corporation bonds for $34 million.

Required:

1. Prepare the appropriate journal entry for each transaction or event during 2018.

2. Indicate any amounts that American would report in its 2018 balance sheet and income statement as a result of these investments.

3. Prepare the appropriate journal entry for each transaction or event during 2019.

1.

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.

Equity investments: The financial instruments which claim ownership in the issuing company and pay a dividend revenue to the investor company, are referred to as equity securities. The investments in equity securities are referred to as equity investments.

Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Expert Solution

To determine

To Journalize: Each transaction or event during 2018.

Explanation of Solution

Purchased the bonds of Company FF on December 12, 2018:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.12.18	Investment in bonds of Company FF	$12,000,000
	Cash		$12,000,000
	(To record the investment made in Company FF)

Table (1)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Purchased the shares of Company FI on December 13, 2018:

Prepare the journal entry to record the investment made in Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.13.18	Investment in shares of Company FI	$22,000,000
	Cash		$22,000,000
	(To record the investment made in Company FI)

Table (2)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the bonds of Company FF on December 15, 2018:

Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Fair value adjustment (1)	$100,000
	Unrealized holding gain—NI		$100,000
	(To record the gain on adjustment)

Table (3)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 15, 2018.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 12, 2018	12,000,000
Adjustment needed to update fair value (Balancing figure) (1)	100,000
Fair value adjustment balance needed on December 15, 2018	12,100,000

Table (4)

(1)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Cash	$12,100,000
	Investment in bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (5)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the Treasury Bonds and Bills on December 22, 2018:

Prepare the journal entry to record the investment made in Treasury Bills and Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.22.18	Investment in Treasury Bills	$56,000,000
	Investment in Treasury Bonds	$65,000,000
	Cash		$121,000,000
	(To record the investment made )

Table (6)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the half of the shares of Company FI on December 23, 2018:

Prepare the journal entry to record the loss from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.18	Unrealized holding loss—NI	$1,000,000
	Fair value adjustment (2)		$1,000,000
	(To record the loss through adjustment)

Table (7)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized loss as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2018	11,000,000
Adjustment needed to update fair value (Balancing figure) (2)	1,000,000
Fair value adjustment balance needed on December 23, 2018	10,100,000

Table (8)

(2)

Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.18	Cash	$1,000,000
	Fair value adjustment	$100,000
	Investment in bonds of Company FI		$1,100,000
	(To record the sale of investment)

Table (9)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bills on December 26, 2018:

Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.18	Fair value adjustment (3)	$1,000,000
	Unrealized holding gain—NI		$1,000,000
	(To record the gain on adjustment)

Table (10)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 26, 2018.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2018	56,000,000
Adjustment needed to update fair value (Balancing figure) (3)	1,000,000
Fair value adjustment balance needed on December 16, 2018	57,000,000

Table (11)

(3)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.18	Cash	$57,000,000
	Investment in Treasury Bills		$56,000,000
	Fair value adjustment		$1,000,000
	(To record the sale of Treasury Bills)

Table (12)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in Treasury Bills is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bonds on December 27, 2018:

Prepare the journal entry to record the loss from the Treasury Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.27.18	Unrealized holding loss—NI	$2,000,000
	Fair value adjustment (4)		$2,000,000
	(To record the loss through adjustment)

Table (13)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2018	65,000,000
Adjustment needed to update fair value (Balancing figure) (4)	2,000,000
Fair value adjustment balance needed on December 27, 2018	63,000,000

Table (14)

(4)

Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.27.18	Cash	$63,000,000
	Fair value adjustment	$2,000,000
	Investment in Treasury Bonds		$65,000,000
	(To record the sale of Treasury Bonds)

Table (15)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
Investment in Treasury Bonds is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Record the dividends received from the shares of Company FI on December 28, 2018:

Prepare the journal entry to record the dividends received from Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.28.18	Cash	$200,000
	Dividend Revenue		$200,000
	(To record the dividends received from the shares of Company FI)

Table (16)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Record the adjusting entry for the shares of Company FI on December 31, 2018:

Prepare the adjusting entry to record the fall in the price of shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.31.18	Unrealized holding loss—NI (5)	$1,000,000
	Fair value adjustment		$1,000,000
	(To record the loss through adjustment)

Table (17)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized holding loss.

Unrealized holding loss = (Number of shares × Cost per share)−Cost price of shares=(1,000,000×$10)−($22,000,000×12)=$10,000,000−$11,000,000=(−)$1,000,000 (5)

2.

Expert Solution

To determine

To Prepare: The Income statement and Balance sheet of Company ASF for the year 2018.

Explanation of Solution

Explanation

Balance Sheet: Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet of Company AFS for the year ending 2018.

Company AFS
Balance Sheet
December 31, 2018
Particulars	Amount ($)	Amount ($)
Assets
Short term Investments
Equity Investments	$11,000,000
Less- Fair value adjustment	$1,000,000
Total Short term Investments		$10,000,000

Table (18)

The balance sheet of Company AFS shall show the short term investments of $10,000,000.

Income statement: Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Prepare the income statement of Company AFS for the year ending 2018.

Company AFS
Income Statement
For the year ended December 31 , 2018
Particulars	Amount ($)	Amount ($)
Investment revenue	$5,200,000
Gain on sale of investments	$9,100,000
Loss on sale of investments	(-) $14,000,000
Unrealized holding loss on investments	(-) $1,000,000

Table (19)

The above elements shall be shown in the income statement of Company AFS.

Sold the remaining shares of Company FI on January 2, 2019:

Prepare the journal entry to record the gain from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
01.02.19	Fair value adjustment (6)	$200,000
	Unrealized holding gain—NI		$200,000
	(To record the gain on adjustment)

Table (20)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on January 2, 2019.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on January 2, 2019, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2018	11,000,000
Adjustment needed to update fair value (Balancing figure) (6)	800,000
Fair value adjustment balance needed on December 15, 2018	10,200,000

Table (21)

(6)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Cash	$12,100,000
	Investment in bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (22)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in shares of Company FI is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the bonds of Company W on January 5, 2019:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
01.05.19	Investment in bonds of Company W	$34,000,000
	Cash		$34,000,000
	(To record the investment made in Company W)

Table (23)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

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Answer 3

Textbook Question

Chapter 12, Problem 12.8P

Various transactions relating to trading securities and equity investments

• LO12-1, LO12-3, LO12-5

American Surety and Fidelity buys and sells securities expecting to earn profits on short-term differences in price. For the first 11 months of 2018, gains from selling trading securities totaled $8 million, losses were $11 million, and the company had earned $5 million in investment revenue. The following selected transactions relate to American’s trading account and equity securities investment account during December 2018, and the first week of 2019. The company’s fiscal year ends on December 31. No trading securities were held by American on December 1, 2018.

2018
Dec. 12	Purchased FF&G Corporation bonds for $12 million.
13	Purchased 2 million Ferry Intercommunications common shares for $22 million.
15	Sold the FF&G Corporation bonds for $12.1 million.
22	Purchased U.S. Treasury bills for $56 million and Treasury bonds for $65 million.
23	Sold half the Ferry Intercommunications common shares for $10 million.
26	Sold the U.S. Treasury bills for $57 million.
27	Sold the Treasury bonds for $63 million.
28	Received cash dividends of $200,000 from the Ferry Intercommunications common shares.
31	Recorded any necessary adjusting entry(s) and closing entries relating to the investments. The market price of the Ferry Intercommunications stock was $10 per share.
2019
Jan. 2	Sold the remaining Ferry Intercommunications common shares for $10.2 million.
5	Purchased Warehouse Designs Corporation bonds for $34 million.

Required:

1. Prepare the appropriate journal entry for each transaction or event during 2018.

2. Indicate any amounts that American would report in its 2018 balance sheet and income statement as a result of these investments.

3. Prepare the appropriate journal entry for each transaction or event during 2019.

1.

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.

Equity investments: The financial instruments which claim ownership in the issuing company and pay a dividend revenue to the investor company, are referred to as equity securities. The investments in equity securities are referred to as equity investments.

Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Expert Solution

To determine

To Journalize: Each transaction or event during 2018.

Explanation of Solution

Purchased the bonds of Company FF on December 12, 2018:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.12.18	Investment in bonds of Company FF	$12,000,000
	Cash		$12,000,000
	(To record the investment made in Company FF)

Table (1)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Purchased the shares of Company FI on December 13, 2018:

Prepare the journal entry to record the investment made in Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.13.18	Investment in shares of Company FI	$22,000,000
	Cash		$22,000,000
	(To record the investment made in Company FI)

Table (2)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the bonds of Company FF on December 15, 2018:

Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Fair value adjustment (1)	$100,000
	Unrealized holding gain—NI		$100,000
	(To record the gain on adjustment)

Table (3)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 15, 2018.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 12, 2018	12,000,000
Adjustment needed to update fair value (Balancing figure) (1)	100,000
Fair value adjustment balance needed on December 15, 2018	12,100,000

Table (4)

(1)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Cash	$12,100,000
	Investment in bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (5)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the Treasury Bonds and Bills on December 22, 2018:

Prepare the journal entry to record the investment made in Treasury Bills and Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.22.18	Investment in Treasury Bills	$56,000,000
	Investment in Treasury Bonds	$65,000,000
	Cash		$121,000,000
	(To record the investment made )

Table (6)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the half of the shares of Company FI on December 23, 2018:

Prepare the journal entry to record the loss from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.18	Unrealized holding loss—NI	$1,000,000
	Fair value adjustment (2)		$1,000,000
	(To record the loss through adjustment)

Table (7)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized loss as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2018	11,000,000
Adjustment needed to update fair value (Balancing figure) (2)	1,000,000
Fair value adjustment balance needed on December 23, 2018	10,100,000

Table (8)

(2)

Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.18	Cash	$1,000,000
	Fair value adjustment	$100,000
	Investment in bonds of Company FI		$1,100,000
	(To record the sale of investment)

Table (9)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bills on December 26, 2018:

Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.18	Fair value adjustment (3)	$1,000,000
	Unrealized holding gain—NI		$1,000,000
	(To record the gain on adjustment)

Table (10)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 26, 2018.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2018	56,000,000
Adjustment needed to update fair value (Balancing figure) (3)	1,000,000
Fair value adjustment balance needed on December 16, 2018	57,000,000

Table (11)

(3)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.18	Cash	$57,000,000
	Investment in Treasury Bills		$56,000,000
	Fair value adjustment		$1,000,000
	(To record the sale of Treasury Bills)

Table (12)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in Treasury Bills is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bonds on December 27, 2018:

Prepare the journal entry to record the loss from the Treasury Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.27.18	Unrealized holding loss—NI	$2,000,000
	Fair value adjustment (4)		$2,000,000
	(To record the loss through adjustment)

Table (13)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2018	65,000,000
Adjustment needed to update fair value (Balancing figure) (4)	2,000,000
Fair value adjustment balance needed on December 27, 2018	63,000,000

Table (14)

(4)

Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.27.18	Cash	$63,000,000
	Fair value adjustment	$2,000,000
	Investment in Treasury Bonds		$65,000,000
	(To record the sale of Treasury Bonds)

Table (15)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
Investment in Treasury Bonds is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Record the dividends received from the shares of Company FI on December 28, 2018:

Prepare the journal entry to record the dividends received from Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.28.18	Cash	$200,000
	Dividend Revenue		$200,000
	(To record the dividends received from the shares of Company FI)

Table (16)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Record the adjusting entry for the shares of Company FI on December 31, 2018:

Prepare the adjusting entry to record the fall in the price of shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.31.18	Unrealized holding loss—NI (5)	$1,000,000
	Fair value adjustment		$1,000,000
	(To record the loss through adjustment)

Table (17)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized holding loss.

Unrealized holding loss = (Number of shares × Cost per share)−Cost price of shares=(1,000,000×$10)−($22,000,000×12)=$10,000,000−$11,000,000=(−)$1,000,000 (5)

2.

Expert Solution

To determine

To Prepare: The Income statement and Balance sheet of Company ASF for the year 2018.

Explanation of Solution

Explanation

Balance Sheet: Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet of Company AFS for the year ending 2018.

Company AFS
Balance Sheet
December 31, 2018
Particulars	Amount ($)	Amount ($)
Assets
Short term Investments
Equity Investments	$11,000,000
Less- Fair value adjustment	$1,000,000
Total Short term Investments		$10,000,000

Table (18)

The balance sheet of Company AFS shall show the short term investments of $10,000,000.

Income statement: Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Prepare the income statement of Company AFS for the year ending 2018.

Company AFS
Income Statement
For the year ended December 31 , 2018
Particulars	Amount ($)	Amount ($)
Investment revenue	$5,200,000
Gain on sale of investments	$9,100,000
Loss on sale of investments	(-) $14,000,000
Unrealized holding loss on investments	(-) $1,000,000

Table (19)

The above elements shall be shown in the income statement of Company AFS.

Sold the remaining shares of Company FI on January 2, 2019:

Prepare the journal entry to record the gain from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
01.02.19	Fair value adjustment (6)	$200,000
	Unrealized holding gain—NI		$200,000
	(To record the gain on adjustment)

Table (20)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on January 2, 2019.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on January 2, 2019, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2018	11,000,000
Adjustment needed to update fair value (Balancing figure) (6)	800,000
Fair value adjustment balance needed on December 15, 2018	10,200,000

Table (21)

(6)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Cash	$12,100,000
	Investment in bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (22)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in shares of Company FI is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the bonds of Company W on January 5, 2019:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
01.05.19	Investment in bonds of Company W	$34,000,000
	Cash		$34,000,000
	(To record the investment made in Company W)

Table (23)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

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Answer 4

Textbook Question

Chapter 12, Problem 12.8P

Various transactions relating to trading securities and equity investments

• LO12-1, LO12-3, LO12-5

American Surety and Fidelity buys and sells securities expecting to earn profits on short-term differences in price. For the first 11 months of 2018, gains from selling trading securities totaled $8 million, losses were $11 million, and the company had earned $5 million in investment revenue. The following selected transactions relate to American’s trading account and equity securities investment account during December 2018, and the first week of 2019. The company’s fiscal year ends on December 31. No trading securities were held by American on December 1, 2018.

2018
Dec. 12	Purchased FF&G Corporation bonds for $12 million.
13	Purchased 2 million Ferry Intercommunications common shares for $22 million.
15	Sold the FF&G Corporation bonds for $12.1 million.
22	Purchased U.S. Treasury bills for $56 million and Treasury bonds for $65 million.
23	Sold half the Ferry Intercommunications common shares for $10 million.
26	Sold the U.S. Treasury bills for $57 million.
27	Sold the Treasury bonds for $63 million.
28	Received cash dividends of $200,000 from the Ferry Intercommunications common shares.
31	Recorded any necessary adjusting entry(s) and closing entries relating to the investments. The market price of the Ferry Intercommunications stock was $10 per share.
2019
Jan. 2	Sold the remaining Ferry Intercommunications common shares for $10.2 million.
5	Purchased Warehouse Designs Corporation bonds for $34 million.

Required:

1. Prepare the appropriate journal entry for each transaction or event during 2018.

2. Indicate any amounts that American would report in its 2018 balance sheet and income statement as a result of these investments.

3. Prepare the appropriate journal entry for each transaction or event during 2019.

1.

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.

Equity investments: The financial instruments which claim ownership in the issuing company and pay a dividend revenue to the investor company, are referred to as equity securities. The investments in equity securities are referred to as equity investments.

Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Expert Solution

To determine

To Journalize: Each transaction or event during 2018.

Explanation of Solution

Purchased the bonds of Company FF on December 12, 2018:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.12.18	Investment in bonds of Company FF	$12,000,000
	Cash		$12,000,000
	(To record the investment made in Company FF)

Table (1)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Purchased the shares of Company FI on December 13, 2018:

Prepare the journal entry to record the investment made in Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.13.18	Investment in shares of Company FI	$22,000,000
	Cash		$22,000,000
	(To record the investment made in Company FI)

Table (2)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the bonds of Company FF on December 15, 2018:

Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Fair value adjustment (1)	$100,000
	Unrealized holding gain—NI		$100,000
	(To record the gain on adjustment)

Table (3)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 15, 2018.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 12, 2018	12,000,000
Adjustment needed to update fair value (Balancing figure) (1)	100,000
Fair value adjustment balance needed on December 15, 2018	12,100,000

Table (4)

(1)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Cash	$12,100,000
	Investment in bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (5)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the Treasury Bonds and Bills on December 22, 2018:

Prepare the journal entry to record the investment made in Treasury Bills and Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.22.18	Investment in Treasury Bills	$56,000,000
	Investment in Treasury Bonds	$65,000,000
	Cash		$121,000,000
	(To record the investment made )

Table (6)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the half of the shares of Company FI on December 23, 2018:

Prepare the journal entry to record the loss from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.18	Unrealized holding loss—NI	$1,000,000
	Fair value adjustment (2)		$1,000,000
	(To record the loss through adjustment)

Table (7)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized loss as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2018	11,000,000
Adjustment needed to update fair value (Balancing figure) (2)	1,000,000
Fair value adjustment balance needed on December 23, 2018	10,100,000

Table (8)

(2)

Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.18	Cash	$1,000,000
	Fair value adjustment	$100,000
	Investment in bonds of Company FI		$1,100,000
	(To record the sale of investment)

Table (9)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bills on December 26, 2018:

Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.18	Fair value adjustment (3)	$1,000,000
	Unrealized holding gain—NI		$1,000,000
	(To record the gain on adjustment)

Table (10)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 26, 2018.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2018	56,000,000
Adjustment needed to update fair value (Balancing figure) (3)	1,000,000
Fair value adjustment balance needed on December 16, 2018	57,000,000

Table (11)

(3)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.18	Cash	$57,000,000
	Investment in Treasury Bills		$56,000,000
	Fair value adjustment		$1,000,000
	(To record the sale of Treasury Bills)

Table (12)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in Treasury Bills is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bonds on December 27, 2018:

Prepare the journal entry to record the loss from the Treasury Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.27.18	Unrealized holding loss—NI	$2,000,000
	Fair value adjustment (4)		$2,000,000
	(To record the loss through adjustment)

Table (13)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2018	65,000,000
Adjustment needed to update fair value (Balancing figure) (4)	2,000,000
Fair value adjustment balance needed on December 27, 2018	63,000,000

Table (14)

(4)

Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.27.18	Cash	$63,000,000
	Fair value adjustment	$2,000,000
	Investment in Treasury Bonds		$65,000,000
	(To record the sale of Treasury Bonds)

Table (15)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
Investment in Treasury Bonds is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Record the dividends received from the shares of Company FI on December 28, 2018:

Prepare the journal entry to record the dividends received from Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.28.18	Cash	$200,000
	Dividend Revenue		$200,000
	(To record the dividends received from the shares of Company FI)

Table (16)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Record the adjusting entry for the shares of Company FI on December 31, 2018:

Prepare the adjusting entry to record the fall in the price of shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.31.18	Unrealized holding loss—NI (5)	$1,000,000
	Fair value adjustment		$1,000,000
	(To record the loss through adjustment)

Table (17)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized holding loss.

Unrealized holding loss = (Number of shares × Cost per share)−Cost price of shares=(1,000,000×$10)−($22,000,000×12)=$10,000,000−$11,000,000=(−)$1,000,000 (5)

2.

Expert Solution

To determine

To Prepare: The Income statement and Balance sheet of Company ASF for the year 2018.

Explanation of Solution

Explanation

Balance Sheet: Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet of Company AFS for the year ending 2018.

Company AFS
Balance Sheet
December 31, 2018
Particulars	Amount ($)	Amount ($)
Assets
Short term Investments
Equity Investments	$11,000,000
Less- Fair value adjustment	$1,000,000
Total Short term Investments		$10,000,000

Table (18)

The balance sheet of Company AFS shall show the short term investments of $10,000,000.

Income statement: Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Prepare the income statement of Company AFS for the year ending 2018.

Company AFS
Income Statement
For the year ended December 31 , 2018
Particulars	Amount ($)	Amount ($)
Investment revenue	$5,200,000
Gain on sale of investments	$9,100,000
Loss on sale of investments	(-) $14,000,000
Unrealized holding loss on investments	(-) $1,000,000

Table (19)

The above elements shall be shown in the income statement of Company AFS.

Sold the remaining shares of Company FI on January 2, 2019:

Prepare the journal entry to record the gain from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
01.02.19	Fair value adjustment (6)	$200,000
	Unrealized holding gain—NI		$200,000
	(To record the gain on adjustment)

Table (20)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on January 2, 2019.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on January 2, 2019, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2018	11,000,000
Adjustment needed to update fair value (Balancing figure) (6)	800,000
Fair value adjustment balance needed on December 15, 2018	10,200,000

Table (21)

(6)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Cash	$12,100,000
	Investment in bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (22)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in shares of Company FI is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the bonds of Company W on January 5, 2019:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
01.05.19	Investment in bonds of Company W	$34,000,000
	Cash		$34,000,000
	(To record the investment made in Company W)

Table (23)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

1.

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.

Equity investments: The financial instruments which claim ownership in the issuing company and pay a dividend revenue to the investor company, are referred to as equity securities. The investments in equity securities are referred to as equity investments.

Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Expert Solution

To determine

To Journalize: Each transaction or event during 2018.

Explanation of Solution

Purchased the bonds of Company FF on December 12, 2018:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.12.18	Investment in bonds of Company FF	$12,000,000
	Cash		$12,000,000
	(To record the investment made in Company FF)

Table (1)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Purchased the shares of Company FI on December 13, 2018:

Prepare the journal entry to record the investment made in Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.13.18	Investment in shares of Company FI	$22,000,000
	Cash		$22,000,000
	(To record the investment made in Company FI)

Table (2)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the bonds of Company FF on December 15, 2018:

Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Fair value adjustment (1)	$100,000
	Unrealized holding gain—NI		$100,000
	(To record the gain on adjustment)

Table (3)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 15, 2018.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 12, 2018	12,000,000
Adjustment needed to update fair value (Balancing figure) (1)	100,000
Fair value adjustment balance needed on December 15, 2018	12,100,000

Table (4)

(1)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Cash	$12,100,000
	Investment in bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (5)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the Treasury Bonds and Bills on December 22, 2018:

Prepare the journal entry to record the investment made in Treasury Bills and Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.22.18	Investment in Treasury Bills	$56,000,000
	Investment in Treasury Bonds	$65,000,000
	Cash		$121,000,000
	(To record the investment made )

Table (6)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the half of the shares of Company FI on December 23, 2018:

Prepare the journal entry to record the loss from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.18	Unrealized holding loss—NI	$1,000,000
	Fair value adjustment (2)		$1,000,000
	(To record the loss through adjustment)

Table (7)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized loss as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2018	11,000,000
Adjustment needed to update fair value (Balancing figure) (2)	1,000,000
Fair value adjustment balance needed on December 23, 2018	10,100,000

Table (8)

(2)

Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.18	Cash	$1,000,000
	Fair value adjustment	$100,000
	Investment in bonds of Company FI		$1,100,000
	(To record the sale of investment)

Table (9)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bills on December 26, 2018:

Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.18	Fair value adjustment (3)	$1,000,000
	Unrealized holding gain—NI		$1,000,000
	(To record the gain on adjustment)

Table (10)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 26, 2018.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2018	56,000,000
Adjustment needed to update fair value (Balancing figure) (3)	1,000,000
Fair value adjustment balance needed on December 16, 2018	57,000,000

Table (11)

(3)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.18	Cash	$57,000,000
	Investment in Treasury Bills		$56,000,000
	Fair value adjustment		$1,000,000
	(To record the sale of Treasury Bills)

Table (12)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in Treasury Bills is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bonds on December 27, 2018:

Prepare the journal entry to record the loss from the Treasury Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.27.18	Unrealized holding loss—NI	$2,000,000
	Fair value adjustment (4)		$2,000,000
	(To record the loss through adjustment)

Table (13)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2018	65,000,000
Adjustment needed to update fair value (Balancing figure) (4)	2,000,000
Fair value adjustment balance needed on December 27, 2018	63,000,000

Table (14)

(4)

Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.27.18	Cash	$63,000,000
	Fair value adjustment	$2,000,000
	Investment in Treasury Bonds		$65,000,000
	(To record the sale of Treasury Bonds)

Table (15)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
Investment in Treasury Bonds is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Record the dividends received from the shares of Company FI on December 28, 2018:

Prepare the journal entry to record the dividends received from Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.28.18	Cash	$200,000
	Dividend Revenue		$200,000
	(To record the dividends received from the shares of Company FI)

Table (16)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Record the adjusting entry for the shares of Company FI on December 31, 2018:

Prepare the adjusting entry to record the fall in the price of shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.31.18	Unrealized holding loss—NI (5)	$1,000,000
	Fair value adjustment		$1,000,000
	(To record the loss through adjustment)

Table (17)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized holding loss.

Unrealized holding loss = (Number of shares × Cost per share)−Cost price of shares=(1,000,000×$10)−($22,000,000×12)=$10,000,000−$11,000,000=(−)$1,000,000 (5)

2.

Expert Solution

To determine

To Prepare: The Income statement and Balance sheet of Company ASF for the year 2018.

Explanation of Solution

Explanation

Balance Sheet: Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet of Company AFS for the year ending 2018.

Company AFS
Balance Sheet
December 31, 2018
Particulars	Amount ($)	Amount ($)
Assets
Short term Investments
Equity Investments	$11,000,000
Less- Fair value adjustment	$1,000,000
Total Short term Investments		$10,000,000

Table (18)

The balance sheet of Company AFS shall show the short term investments of $10,000,000.

Income statement: Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Prepare the income statement of Company AFS for the year ending 2018.

Company AFS
Income Statement
For the year ended December 31 , 2018
Particulars	Amount ($)	Amount ($)
Investment revenue	$5,200,000
Gain on sale of investments	$9,100,000
Loss on sale of investments	(-) $14,000,000
Unrealized holding loss on investments	(-) $1,000,000

Table (19)

The above elements shall be shown in the income statement of Company AFS.

Sold the remaining shares of Company FI on January 2, 2019:

Prepare the journal entry to record the gain from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
01.02.19	Fair value adjustment (6)	$200,000
	Unrealized holding gain—NI		$200,000
	(To record the gain on adjustment)

Table (20)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on January 2, 2019.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on January 2, 2019, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2018	11,000,000
Adjustment needed to update fair value (Balancing figure) (6)	800,000
Fair value adjustment balance needed on December 15, 2018	10,200,000

Table (21)

(6)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Cash	$12,100,000
	Investment in bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (22)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in shares of Company FI is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the bonds of Company W on January 5, 2019:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
01.05.19	Investment in bonds of Company W	$34,000,000
	Cash		$34,000,000
	(To record the investment made in Company W)

Table (23)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Answer 8

1.

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.

Equity investments: The financial instruments which claim ownership in the issuing company and pay a dividend revenue to the investor company, are referred to as equity securities. The investments in equity securities are referred to as equity investments.

Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Expert Solution

To determine

To Journalize: Each transaction or event during 2018.

Explanation of Solution

Purchased the bonds of Company FF on December 12, 2018:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.12.18	Investment in bonds of Company FF	$12,000,000
	Cash		$12,000,000
	(To record the investment made in Company FF)

Table (1)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Purchased the shares of Company FI on December 13, 2018:

Prepare the journal entry to record the investment made in Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.13.18	Investment in shares of Company FI	$22,000,000
	Cash		$22,000,000
	(To record the investment made in Company FI)

Table (2)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the bonds of Company FF on December 15, 2018:

Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Fair value adjustment (1)	$100,000
	Unrealized holding gain—NI		$100,000
	(To record the gain on adjustment)

Table (3)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 15, 2018.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 12, 2018	12,000,000
Adjustment needed to update fair value (Balancing figure) (1)	100,000
Fair value adjustment balance needed on December 15, 2018	12,100,000

Table (4)

(1)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Cash	$12,100,000
	Investment in bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (5)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the Treasury Bonds and Bills on December 22, 2018:

Prepare the journal entry to record the investment made in Treasury Bills and Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.22.18	Investment in Treasury Bills	$56,000,000
	Investment in Treasury Bonds	$65,000,000
	Cash		$121,000,000
	(To record the investment made )

Table (6)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the half of the shares of Company FI on December 23, 2018:

Prepare the journal entry to record the loss from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.18	Unrealized holding loss—NI	$1,000,000
	Fair value adjustment (2)		$1,000,000
	(To record the loss through adjustment)

Table (7)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized loss as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2018	11,000,000
Adjustment needed to update fair value (Balancing figure) (2)	1,000,000
Fair value adjustment balance needed on December 23, 2018	10,100,000

Table (8)

(2)

Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.18	Cash	$1,000,000
	Fair value adjustment	$100,000
	Investment in bonds of Company FI		$1,100,000
	(To record the sale of investment)

Table (9)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bills on December 26, 2018:

Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.18	Fair value adjustment (3)	$1,000,000
	Unrealized holding gain—NI		$1,000,000
	(To record the gain on adjustment)

Table (10)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 26, 2018.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2018	56,000,000
Adjustment needed to update fair value (Balancing figure) (3)	1,000,000
Fair value adjustment balance needed on December 16, 2018	57,000,000

Table (11)

(3)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.18	Cash	$57,000,000
	Investment in Treasury Bills		$56,000,000
	Fair value adjustment		$1,000,000
	(To record the sale of Treasury Bills)

Table (12)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in Treasury Bills is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bonds on December 27, 2018:

Prepare the journal entry to record the loss from the Treasury Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.27.18	Unrealized holding loss—NI	$2,000,000
	Fair value adjustment (4)		$2,000,000
	(To record the loss through adjustment)

Table (13)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2018	65,000,000
Adjustment needed to update fair value (Balancing figure) (4)	2,000,000
Fair value adjustment balance needed on December 27, 2018	63,000,000

Table (14)

(4)

Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.27.18	Cash	$63,000,000
	Fair value adjustment	$2,000,000
	Investment in Treasury Bonds		$65,000,000
	(To record the sale of Treasury Bonds)

Table (15)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
Investment in Treasury Bonds is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Record the dividends received from the shares of Company FI on December 28, 2018:

Prepare the journal entry to record the dividends received from Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.28.18	Cash	$200,000
	Dividend Revenue		$200,000
	(To record the dividends received from the shares of Company FI)

Table (16)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Record the adjusting entry for the shares of Company FI on December 31, 2018:

Prepare the adjusting entry to record the fall in the price of shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.31.18	Unrealized holding loss—NI (5)	$1,000,000
	Fair value adjustment		$1,000,000
	(To record the loss through adjustment)

Table (17)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized holding loss.

Unrealized holding loss = (Number of shares × Cost per share)−Cost price of shares=(1,000,000×$10)−($22,000,000×12)=$10,000,000−$11,000,000=(−)$1,000,000 (5)

Answer 9

1.

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.

Equity investments: The financial instruments which claim ownership in the issuing company and pay a dividend revenue to the investor company, are referred to as equity securities. The investments in equity securities are referred to as equity investments.

Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Expert Solution

Answer 10

1.

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.

Equity investments: The financial instruments which claim ownership in the issuing company and pay a dividend revenue to the investor company, are referred to as equity securities. The investments in equity securities are referred to as equity investments.

Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Expert Solution

Answer 11

Expert Solution

Answer 12

To determine

To Journalize: Each transaction or event during 2018.

Answer 13

Explanation of Solution

Purchased the bonds of Company FF on December 12, 2018:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.12.18	Investment in bonds of Company FF	$12,000,000
	Cash		$12,000,000
	(To record the investment made in Company FF)

Table (1)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Purchased the shares of Company FI on December 13, 2018:

Prepare the journal entry to record the investment made in Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.13.18	Investment in shares of Company FI	$22,000,000
	Cash		$22,000,000
	(To record the investment made in Company FI)

Table (2)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the bonds of Company FF on December 15, 2018:

Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Fair value adjustment (1)	$100,000
	Unrealized holding gain—NI		$100,000
	(To record the gain on adjustment)

Table (3)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 15, 2018.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 12, 2018	12,000,000
Adjustment needed to update fair value (Balancing figure) (1)	100,000
Fair value adjustment balance needed on December 15, 2018	12,100,000

Table (4)

(1)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Cash	$12,100,000
	Investment in bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (5)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the Treasury Bonds and Bills on December 22, 2018:

Prepare the journal entry to record the investment made in Treasury Bills and Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.22.18	Investment in Treasury Bills	$56,000,000
	Investment in Treasury Bonds	$65,000,000
	Cash		$121,000,000
	(To record the investment made )

Table (6)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Sold the half of the shares of Company FI on December 23, 2018:

Prepare the journal entry to record the loss from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.18	Unrealized holding loss—NI	$1,000,000
	Fair value adjustment (2)		$1,000,000
	(To record the loss through adjustment)

Table (7)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized loss as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2018	11,000,000
Adjustment needed to update fair value (Balancing figure) (2)	1,000,000
Fair value adjustment balance needed on December 23, 2018	10,100,000

Table (8)

(2)

Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.23.18	Cash	$1,000,000
	Fair value adjustment	$100,000
	Investment in bonds of Company FI		$1,100,000
	(To record the sale of investment)

Table (9)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
Investment in bonds of Company FF is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bills on December 26, 2018:

Prepare the journal entry to record the gain from the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.18	Fair value adjustment (3)	$1,000,000
	Unrealized holding gain—NI		$1,000,000
	(To record the gain on adjustment)

Table (10)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 26, 2018.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2018	56,000,000
Adjustment needed to update fair value (Balancing figure) (3)	1,000,000
Fair value adjustment balance needed on December 16, 2018	57,000,000

Table (11)

(3)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.26.18	Cash	$57,000,000
	Investment in Treasury Bills		$56,000,000
	Fair value adjustment		$1,000,000
	(To record the sale of Treasury Bills)

Table (12)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in Treasury Bills is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Sold the Treasury Bonds on December 27, 2018:

Prepare the journal entry to record the loss from the Treasury Bonds.

Date	Account Title	Debit ($)	Credit ($)
12.27.18	Unrealized holding loss—NI	$2,000,000
	Fair value adjustment (4)		$2,000,000
	(To record the loss through adjustment)

Table (13)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized gain as on December 15, 2018, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 22, 2018	65,000,000
Adjustment needed to update fair value (Balancing figure) (4)	2,000,000
Fair value adjustment balance needed on December 27, 2018	63,000,000

Table (14)

(4)

Prepare the journal entry to record the sale of the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.27.18	Cash	$63,000,000
	Fair value adjustment	$2,000,000
	Investment in Treasury Bonds		$65,000,000
	(To record the sale of Treasury Bonds)

Table (15)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is debited due to loss.
Investment in Treasury Bonds is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Record the dividends received from the shares of Company FI on December 28, 2018:

Prepare the journal entry to record the dividends received from Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.28.18	Cash	$200,000
	Dividend Revenue		$200,000
	(To record the dividends received from the shares of Company FI)

Table (16)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Record the adjusting entry for the shares of Company FI on December 31, 2018:

Prepare the adjusting entry to record the fall in the price of shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
12.31.18	Unrealized holding loss—NI (5)	$1,000,000
	Fair value adjustment		$1,000,000
	(To record the loss through adjustment)

Table (17)

Unrealized Holding Loss–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, stockholders’ equity value is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on December 23, 2018.

Working Notes:

Compute the unrealized holding loss.

Unrealized holding loss = (Number of shares × Cost per share)−Cost price of shares=(1,000,000×$10)−($22,000,000×12)=$10,000,000−$11,000,000=(−)$1,000,000 (5)

Answer 14

2.

Expert Solution

To determine

To Prepare: The Income statement and Balance sheet of Company ASF for the year 2018.

Explanation of Solution

Explanation

Balance Sheet: Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet of Company AFS for the year ending 2018.

Company AFS
Balance Sheet
December 31, 2018
Particulars	Amount ($)	Amount ($)
Assets
Short term Investments
Equity Investments	$11,000,000
Less- Fair value adjustment	$1,000,000
Total Short term Investments		$10,000,000

Table (18)

The balance sheet of Company AFS shall show the short term investments of $10,000,000.

Income statement: Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Prepare the income statement of Company AFS for the year ending 2018.

Company AFS
Income Statement
For the year ended December 31 , 2018
Particulars	Amount ($)	Amount ($)
Investment revenue	$5,200,000
Gain on sale of investments	$9,100,000
Loss on sale of investments	(-) $14,000,000
Unrealized holding loss on investments	(-) $1,000,000

Table (19)

The above elements shall be shown in the income statement of Company AFS.

Sold the remaining shares of Company FI on January 2, 2019:

Prepare the journal entry to record the gain from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
01.02.19	Fair value adjustment (6)	$200,000
	Unrealized holding gain—NI		$200,000
	(To record the gain on adjustment)

Table (20)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on January 2, 2019.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on January 2, 2019, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2018	11,000,000
Adjustment needed to update fair value (Balancing figure) (6)	800,000
Fair value adjustment balance needed on December 15, 2018	10,200,000

Table (21)

(6)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Cash	$12,100,000
	Investment in bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (22)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in shares of Company FI is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the bonds of Company W on January 5, 2019:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
01.05.19	Investment in bonds of Company W	$34,000,000
	Cash		$34,000,000
	(To record the investment made in Company W)

Table (23)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Answer 15

2.

Expert Solution

Answer 16

2.

Expert Solution

Answer 17

Expert Solution

Answer 18

To determine

To Prepare: The Income statement and Balance sheet of Company ASF for the year 2018.

Answer 19

Explanation of Solution

Explanation

Balance Sheet: Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet of Company AFS for the year ending 2018.

Company AFS
Balance Sheet
December 31, 2018
Particulars	Amount ($)	Amount ($)
Assets
Short term Investments
Equity Investments	$11,000,000
Less- Fair value adjustment	$1,000,000
Total Short term Investments		$10,000,000

Table (18)

The balance sheet of Company AFS shall show the short term investments of $10,000,000.

Income statement: Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Prepare the income statement of Company AFS for the year ending 2018.

Company AFS
Income Statement
For the year ended December 31 , 2018
Particulars	Amount ($)	Amount ($)
Investment revenue	$5,200,000
Gain on sale of investments	$9,100,000
Loss on sale of investments	(-) $14,000,000
Unrealized holding loss on investments	(-) $1,000,000

Table (19)

The above elements shall be shown in the income statement of Company AFS.

Sold the remaining shares of Company FI on January 2, 2019:

Prepare the journal entry to record the gain from the shares of Company FI.

Date	Account Title	Debit ($)	Credit ($)
01.02.19	Fair value adjustment (6)	$200,000
	Unrealized holding gain—NI		$200,000
	(To record the gain on adjustment)

Table (20)

Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is adjusted to update the fair value as on January 2, 2019.

Unrealized Holding Gain–NI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, it is credited.

Working Notes:

Compute the unrealized gain as on January 2, 2019, by adjusting the cost to the fair value.

Details	Amount ($)
Fair value adjustment balance as on December 13, 2018	11,000,000
Adjustment needed to update fair value (Balancing figure) (6)	800,000
Fair value adjustment balance needed on December 15, 2018	10,200,000

Table (21)

(6)

Prepare the journal entry to record the sale of the bonds of Company FF.

Date	Account Title	Debit ($)	Credit ($)
12.15.18	Cash	$12,100,000
	Investment in bonds of Company FF		$12,000,000
	Fair value adjustment		$100,000
	(To record the sale of the bonds of Company FF)

Table (22)

Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited due to gain.
Investment in shares of Company FI is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Purchased the bonds of Company W on January 5, 2019:

Prepare the journal entry to record the investment made in Company FF.

Date	Account Title	Debit ($)	Credit ($)
01.05.19	Investment in bonds of Company W	$34,000,000
	Cash		$34,000,000
	(To record the investment made in Company W)

Table (23)

Investments is being made, this increases the assets; hence debit the investment.
Cash is being paid, cash is an asset which is being reduced; hence credit the cash account.

Answer 20

Ch. 12 - All investments in debt securities are classified...Ch. 12 - When market rates of interest rise after a...Ch. 12 - Does GAAP distinguish between fair values that are...Ch. 12 - When a debt investment is acquired to be held for...Ch. 12 - Prob. 12.5Q Ch. 12 - What is comprehensive income? Its composition...Ch. 12 - Why are holding gains and losses treated...Ch. 12 - Prob. 12.8Q Ch. 12 - Prob. 12.9Q Ch. 12 - Prob. 12.10Q

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