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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Fair value journal entries, trading investments

The investments of Charger Inc. include a single investment: 14,500 shares of Raiders Inc. common stock purchased on February 24, Year 1, for $38 per share including brokerage commission. These shares were classified as trading securities. As of the December 31, Year 1, balance sheet date, the share price had increased to $42 per share.

a. Journalize the entries to acquire the investment on February 24 and record the adjustment to fair value on December 31, Year 1.

b. How is the unrealized gain or loss for trading investments reported on the financial statements?

(a)

To determine

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.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

To journalize: The stock investment transactions in the books of Company C

Explanation

Prepare journal entry for the purchase of 14,500 shares of Company R, at $38 per share.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
February 24 Investments–Company R Stock   551,000  
             Cash     551,000
    (To record purchase of shares for cash)      

Table (1)

Explanation:

  • Investments–Company R Stock is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Working Notes:

Compute amount of cash paid to purchase Company R’s stock.

Cash paid = (Number of shares purchased× Price per share)(14,500 shares ×$38)= $551,000

Prepare adjusting entry for valuation of trading securities transaction

(b)

To determine

To discuss: The reporting of trading investments on the financial statements

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