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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

Gruden Bancorp Inc. purchased a portfolio of trading securities during Year 1. The com and fair value of this portfolio on December 31, Year 1, was as follows:

Name Number of Shares Total Cost Total Fair Value
Griffin Inc 1.600 $40,000 $44,800
Luck Company 1,250 37,500 33,750
Wilson Company 1,000 40,000 37,000
Total   $117,500 $115,550

On May 10, Year 2, Gruden Bancorp Inc. purchased 1,200 shares of Carroll Inc. at $29 per share plus a $100 brokerage commission.

Provide the journal entries to record the following:

a. The adjustment of the trading security portfolio to fair value on December 31, Year 1.

b. The May 10, Year 2, purchase of Carroll Inc. stock.

(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 year-end valuation of trading securities transaction

Explanation

  • Unrealized Loss on Trading Investments 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 reduce stockholders’ equity value, and a decrease in stockholders’ equity value is debited.
  • Valuation Allowance for Trading Investments is a contra-asset account. The account is credited because the market price was decreased (loss) to $115,550 from the cost of $117,500.

Working Notes:

Compute the unrealized gain (loss) as on December 31...

(b)

To determine

To journalize: The stock investment transactions in the books of Incorporation BC

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