(1)
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.
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
(1)
Explanation of Solution
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 ($) | |
2016 | |||||
February | 14 | Investments–Company AP Stock | 124,992 | ||
Cash | 124,992 | ||||
(To record purchase of shares for cash) |
Table (1)
- 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.
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 ($) | |
2016 | |||||
April | 1 | Investments–Company AR Stock | 43,792 | ||
Cash | 43,792 | ||||
(To record purchase of shares for cash) |
Table (2)
- 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.
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 ($) | |
2016 | |||||
June | 1 | Cash | 19,100 | ||
Gain on Sale of Investments | 3,476 | ||||
Investments–Company AP Stock | 15,624 | ||||
(To record sale of shares) |
Table (3)
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Loss on Sale of Investments is a loss or expense account. Since losses decrease equity, equity value is decreased, and a decrease in equity is debited.
- Investments–Company AP Stock is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.
Working Notes:
Calculate the realized gain (loss) on sale of stock.
Step 1: Compute cash received from sale proceeds.
Step 2: Compute cost of stock investment sold.
Step 3: Compute realized gain (loss) on sale of stock.
Note: Refer to Steps 1 and 2 for value and computation of cash received and cost of stock investment sold.
Prepare journal entry for the dividend received from Company AP for 4,200 shares.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
June | 27 | Cash | 840 | ||
Dividend Revenue | 840 | ||||
(To record receipt of dividend revenue) |
Table (4)
- 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.
Prepare adjusting entry for valuation of trading securities transaction.
Figure(1)
- 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 (5)
Step 2: Compute the cost per share of Company AP.
Step 3: Compute the cost per share of Company AR.
Step 4: Compute the cost of the portfolio of the trading investment, as on December 31, 2016.
Security | Number of Shares | Cost per Share | = | Cost of Investment | |
Company AP | 4,200 shares | $26.04 | = | $109,368 | |
Company AR | 2,300 shares | 19.04 | = | 43,792 | |
Total | $153,160 |
Table (6)
Note: Refer to Steps 3 and 4 for cost per share of Company AP and Company AR.
Step 5: Compute the unrealized gain (loss) as on December 31, 2016.
Details | Amount ($) |
Trading investments at fair value, December 31 (From Table-5) | $181,150 |
Less: Trading investments at cost, December 31 (From Table-6) | (153,160) |
Unrealized loss on trading investments | $27,990 |
Table (7)
Prepare journal entry for the purchase of 1,200 shares of Company AT, at $65 per share, and a brokerage commission of $120.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
March | 14 | Investments–Company AT Stock | 78,120 | ||
Cash | 78,120 | ||||
(To record purchase of shares for cash) |
Table (8)
- Investments–Company AT Stock is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
- Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Working Notes:
Compute amount of cash paid to purchase Company AT’s stock.
Prepare journal entry for the dividend received from Company AP for 4,200 shares.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
June | 26 | Cash | 882 | ||
Dividend Revenue | 882 | ||||
(To record receipt of dividend revenue) |
Table (9)
- 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.
Prepare journal entry for sale of 480 shares of Company AT at $60, with a brokerage of $50.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
July | 30 | Cash | 28,750 | ||
Loss on Sale of Investments | 2,498 | ||||
Investments–Company AT Stock | 31,248 | ||||
(To record sale of shares) |
Table (10)
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Loss on Sale of Investments is an expense account. Since expenses and losses decrease equity, equity value is decreased, and a decrease in equity is debited.
- Investments–Company AT Stock is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.
Working Notes:
Calculate the realized gain (loss) on sale of stock.
Step 1: Compute cash received from sale proceeds.
Step 2: Compute cost of stock investment sold.
Step 3: Compute realized gain (loss) on sale of stock.
Note: Refer to Steps 1 and 2 for value and computation of cash received and cost of stock investment sold.
Prepare adjusting entry for valuation of trading securities transaction.
Figure (2)
- Unrealized Loss on Trading Investments is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, and a decrease in stockholders’ equity value is debited.
- Valuation Allowance for Trading Investments is a contra-asset account. The account is credited because the market price was decreased (loss).
Working Notes:
Compute the unrealized gain (loss) as on December 31, 2017.
Details | Amount ($) |
Unrealized loss as on December 31, 2017 | $12,032 |
Add: Unrealized gain as on December 31, 2016 (From Table-7) | 27,990 |
Unrealized loss on trading investments | $40,022 |
Table (11)
(2)
To indicate: The presentation of trading investments on the current assets section of the balance sheet.
(2)
Explanation of Solution
Balance sheet presentation:
Company Z | ||
Balance Sheet (Partial) | ||
December 31, 2017 | ||
Assets | ||
Current assets: | ||
Trading investments (at cost) | $200,032 | |
Less valuation allowance for trading investments | (12,032) | |
Trading investments (at fair value) | $188,000 |
Table (12)
(3)
To discuss: The reporting of trading investments on the financial statements
(3)
Explanation of Solution
Unrealized gain or loss is the result of change in trading investments cost and fair values, and reported as Other Revenues (Losses) on the income statement. The unrealized gain will be added to the net income and unrealized loss will be deducted from the net income. In 2016, Company Z would report $27,990 of unrealized gain as Other Income on the income statement. In the 2017, Company Z would report $40,022 of unrealized loss as Other Losses on the income statement.
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Chapter 15 Solutions
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- Trading Securities Pear Investments began operations in 2020 and invests in securities classified as trading securities. During 2020, it entered into the following trading security transactions: Purchased 20,000 shares of ABC common stock at $38 per share Purchased 32,000 shares of XYZ common stock at $17 per share At December 31, 2020, ABC common stock was trading at $39.50 per share and XYZ common stock was trading at $16.50 per share. Required: 1. Prepare the necessary adjusting entry to value the trading securities at fair market value. 2. CONCEPTUAL CONNECTION What is the income statement effect of this adjusting entry?arrow_forwardThe investments of Steelers Inc. include a single investment: 33,100 shares of Bengals Inc. common stock purchased on September 12, 2016, for 13 per share including brokerage commission. These shares were classified as available-for-sale securities. As of the December 31, 2016, balance sheet date, the share price declined to 11 per share. a. Journalize the entries to acquire the investment on September 12 and record the adjustment to fair value on December 31, 2016. b. How is the unrealized gain or loss for available-for-sale investments disclosed on the financial statements?arrow_forwardSelected transactions completed by Equinox Products Inc. during the fiscal year ended December 31, 2016, were as follows: a. Issued 15,000 shares of 20 par common stock at 30, receiving cash. b. Issued 4,000 shares of 80 par preferred 5% stock at 100, receiving cash. c. Issued 500,000 of 10-year, 5% bonds at 104, with interest payable semiannually. d. Declared a quarterly dividend of 0.50 per share on common stock and 1.00 per share on preferred stock. On the date of record, 100,000 shares of common stock were outstanding, no treasury shares were held, and 20,000 shares of preferred stock were outstanding. e. Paid the cash dividends declared in (d). f. Purchased 7,500 shares of Solstice Corp. at 40 per share, plus a 150 brokerage commission. The investment is classified as an available-for-sale investment. g. Purchased 8,000 shares of treasury common stock at 33 per share. h. Purchased 40,000 shares of Pinkberry Co. stock directly from the founders for 24 per share. Pinkberry has 125,000 shares issued and outstanding. Equinox Products Inc. treated the investment as an equity method investment. i. Declared a 1.00 quarterly cash dividend per share on preferred stock. On the date of record, 20,000 shares of preferred stock had been issued. j. Paid the cash dividends to the preferred stockholders. k. Received 27,500 dividend from Pinkberry Co. investment in (h). l. Purchased 90,000 of Dream Inc. 10-year, 5% bonds, directly from the issuing company, at their face amount plus accrued interest of 375. The bonds are classified as a heldtomaturity long-term investment. m. Sold, at 38 per share, 2,600 shares of treasury common stock purchased in (g). n. Received a dividend of 0.60 per share from the Solstice Corp. investment in (f). o. Sold 1,000 shares of Solstice Corp. at 45, including commission. p. Recorded the payment of semiannual interest on the bonds issued in (c) and the amortization of the premium for six months. The amortization is determined using the straight-line method. q. Accrued interest for three months on the Dream Inc. bonds purchased in (l). r. Pinkberry Co. recorded total earnings of 240,000. Equinox Products recorded equity earnings for its share of Pinkberry Co. net income. s. The fair value for Solstice Corp. stock was 39.02 per share on December 31, 2016. The investment is adjusted to fair value, using a valuation allowance account. Assume Valuation Allowance for Available-for-Sale Investments had a beginning balance of zero. Instructions 1. Journalize the selected transactions. 2. After all of the transactions for the year ended December 31, 2016, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data that follows were taken from the records of Equinox Products Inc. a. Prepare a multiple-step income statement for the year ended December 31, 2016, concluding with earnings per share. In computing earnings per share, assume that the average number of common shares outstanding was 100,000 and preferred dividends were 100,000. (Round earnings per share to the nearest cent.) b. Prepare a retained earnings statement for the year ended December 31, 2016. c. Prepare a balance sheet in report form as of December 31, 2016.arrow_forward
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Pinkberry has 125,000 shares issued and outstanding. Equinox Products Inc. treated the investment as an equity method investment. i. Declared a 1.00 quarterly cash dividend per share on preferred stock. On the date of record, 20,000 shares of preferred stock had been issued. j. Paid the cash dividends to the preferred stockholders. k. Received 27,500 dividend from Pinkberry Co. investment in (h). l. Purchased 90,000 of Dream Inc. 10-year, 5% bonds, directly from the issuing company, at their face amount plus accrued interest of 375. The bonds are classified as a held- to-maturitv long-term investment. m. Sold, at 38 per share, 2,600 shares of treasury common stock purchased in (g). n. Received a dividend of 0.60 per share from the Solstice Corp. investment in (f). o. Sold 1,000 shares of Solstice Corp. at 545, including commission. p. Recorded the payment of semiannual interest on the bonds issued in (c) and the amortization of the premium for six months. 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