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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

Stock investment transactions, trading securities

Zeus Investments Inc. is a regional investment company that began operations on January 1, Year 1. The following transactions relate to trading securities acquired by Zeus Investments Inc., which has a fiscal year ending on December 31:

Year 1  
Feb. 14. Purchased 4,800 shares of Apollo Inc. as a trading security at 126 per share plus a brokerage commission of $192.
Apr. 1. Purchased 2,300 shares of Ares Inc. as a trading security at $19 per share plus a brokerage commission of $92.
June 1. Sold 600 shares of Apollo Inc. for $32 per share less a $100 brokerage commission.
27 Received an annual dividend of $0.20 per share on Apollo Inc. Stock.
Dec. 31. The portfolio of trading securities was adjusted to fair values of $33 and $18.50 per share for Apollo Inc. and Ares Inc., respectively.
Year 2  
Mar. 14. Purchased 1,200 shares of Athena Inc. as a trading security at $65 per .share plus a $120 brokerage commission.
June 26. Received an annual dividend of $0.21 per share on Apollo Inc. stock.
July 30. Sold 480 shares of Athena Inc. for $60 per share less a $50 brokerage commission.
Dec. 31. The portfolio of trading securities had a cost of $200,032 and a fair value of $188,000, requiring a credit balance in Valuation Allowance for Trading Investments of $12,032 ($188,000−$200,032). Thus, the debit balance from December 31, Year 1, is to be adjusted to the new balance.

Instructions

  1. 1. Journalize the entries to record these transactions.
  2. 2. Prepare the investment-related current asset balance sheet presentation for Zeus Investments Inc. on December 31, Year 2.
  3. 3. How are unrealized gains or losses on trading investments presented in the financial statements of Zeus Investments Inc.?

(1)

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 Z

Explanation

Prepare journal entry for the purchase of 4,800 shares of Company AP, at $26 per share, and a brokerage commission of $192.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
Year 1        
February 14 Investments–Company AP Stock   124,992  
             Cash     124,992
    (To record purchase of shares for cash)      

Table (1)

Explanation:

  • Investments–Company AP 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 AP’s stock.

Cash paid = {(Number of shares purchased× Price per share)+Brokerage commission}(4,800 shares ×$26)+$192= $124,992

Prepare journal entry for the purchase of 2,300 shares of Company AR, at $19 per share, and a brokerage commission of $92.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
Year 1        
April 1 Investments–Company AR Stock   43,792  
             Cash     43,792
    (To record purchase of shares for cash)      

Table (2)

Explanation:

  • Investments–Company AR 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 AR’s stock.

Cash paid = {(Number of shares purchased× Price per share)+Brokerage commission}(2,300 shares ×$19)+$92= $43,792

Prepare journal entry for sale of 600 shares of Company AP, at $32, with a brokerage of $100.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
Year 1        
June 1 Cash   19,100  
          Gain on Sale of Investments     3,476
          Investments–Company AP Stock     15,624
    (To record sale of shares)      

Table (3)

Explanation:

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Loss on Sale of Investments is a loss or expense account. Since losses decrease equity, equity value is decreased, and a decrease in equity is debited.
  • Investments–Company AP Stock is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.

Working Notes:

Calculate the realized gain (loss) on sale of stock.

Step 1: Compute cash received from sale proceeds.

Cash received = {(Number of shares sold× Sale price per share)Brokerage commission}(600 shares ×$32)$100= $19,100

Step 2: Compute cost of stock investment sold.

Cost of stock investment sold} = Number of shares sold × Price per share= Number of shares sold ×Cost of 4,800 sharesNumber of shares= 600 shares ×$124,9924,800 shares= $15,624

Step 3: Compute realized gain (loss) on sale of stock.

Realized gain (loss)on investments} = {Cash received –Cost of stock investment }= $19,100–$15,624= $3,476

Note: Refer to Steps 1 and 2 for value and computation of cash received and cost of stock investment sold.

Prepare journal entry for the dividend received from Company AP for 4,200 shares.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
Year 1        
June 27 Cash   840  
             Dividend Revenue     840
    (To record receipt of dividend revenue)      

Table (4)

Explanation:

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Dividend Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.

Working Notes:

Compute amount of dividend received on Company AP’s stock.

Dividend received = {Number of shares × Dividend per share}(4,800–600) shares ×$0.20= $840

Prepare adjusting entry for valuation of trading securities transaction.

Table (5)

Explanation:

  • Valuation Allowance for Trading Investments is a contra-asset account. The account is credited because the market price was increased (gain) to $181,150 from the cost of $153,160.
  • Unrealized Gain on Trading Investments is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and increase stockholders’ equity value, and an increase in stockholders’ equity value is debited.

Working Notes:

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

Step 1: Compute the fair value of the portfolio of the trading investment.

Security Number of Shares × Fair Market Value = Fair Market Value of Investment
Company AP 4,200 shares × $33.00 = $138,600
Company AR 2,300 shares × 18.50 = 42,550
Total   $181,150

Table (6)

Step 2: Compute the cost per share of Company AP

(2)

To determine

To indicate: The presentation of trading investments on the current assets section of the balance sheet

(3)

To determine

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

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