Chapter 15, Problem 1APSA

To determine

Concept Introduction:

Trading securities are the investments made in the securities with the intent to sell them in short-term.

The Fair-Value adjustments are recorded at the year-end to record the deviations from the price at which securities have been purchased. If the fair value of the shares at the year-end are more than the price at which shares are purchased, the unrealized gain will be recorded, if it less than unrealized loss is recorded and fair value adjustment accounts are created.

To prepare:

Journal entries for Carlsville Company for the years 2017, 2018 and 2019.

Answer to Problem 1APSA

Solution:

The journal entries for Carlsville Company for the years 2017, 2018 and 2019 are $–$

For the year 2017 $–$

Date	Accounts Titles and Descriptions	Debit ( in $ )	Credit ( in $ )
2017
Jan-20	Short-term investment - Ford Motor	20,925
	Cash		20,925
	(To record purchase of equity shares of Ford )
Feb-09	Short-term investment - Lucent	97,928
	Cash		97,928
	(To record purchase of equity shares of Lucent )
Oct-12	Short-term investment - Z -seven	5,825
	Cash		5,825
	(To record purchase of equity shares of Z-seven )
Dec-31	Fair Value adjustment - trading	5,322
	Unrealised gain		5,322
	To adjust the trading securities amount to $ 130,000)

Explanation of Solution

The above journal entries can be explained as under $–$

In the transaction on Jan. 20, the shares of Ford Motor Co. were purchased for $ 26 per shares add commission.

The purchase price will be calculated as $–$

$Purchaseprice=\left(\$26X800shares\right)+\$125$

$Purchaseprice=\text{ \$ 20,925}$

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited.

In the transaction on Feb. 09, the shares of Lucent Co. were purchased for $ 44.25 per shares add commission $ 578.

The purchase price will be calculated as $–$

$Purchaseprice=\left(\$\text{ 44}\text{.25 }X\text{ 2,2}00shares\right)+\$\text{ 578}$

$Purchaseprice=\text{ \$ 97,928}$

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited.

In the transaction on Oct. 12, the shares of Z-Seven Co. were purchased for $ 7.50 per shares add commission $ 200.

The purchase price will be calculated as $–$

$Purchaseprice=\left(\$\text{ 7}\text{.50 }X\text{ 750 }shares\right)+\$\text{ 200}$

$Purchaseprice=\text{ \$ 5,825}$

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited.

In the transaction on Dec. 31, the prices of the shares purchased need to be adjusted to a Fair value of $ 130,000. The amount of gain or loss on the shares will be calculated as under

$Unrealisedgainor\left(loss\right)=Fairvalue–TotalCostoftheshares$

$\begin{array}{l}Unrealisedgainor\left(loss\right)=\text{ \$ 130,000 }–\text{ ( \$20,925 + \$97,928+\$5,825)}\\ Unrealisedgainor\left(loss\right)=\$5,322\end{array}$

Since, there is unrealised gain, we will debit the Fair value adjustment account and credit unrealised gain.

For the year 2018 $–$

Date	Accounts Titles and Descriptions	Debit ( in $ )	Credit ( in $ )
2018
Apr-15	Cash	22915
	Short-term investment - Ford Motor		20,925
	Gain on short term investment		1,990
	(To record sale of Ford securities)
Jul-05	Cash	7585
	Short-term investment - Z -seven		5,825
	Gain on short term investment		1,760
	(To record sale of Z- Seven securities)
Jul-22	Short-term investment - Hunt	48,444
	Cash		48,444
	(To record purchase of equity shares of Hunt )
Aug-19	Short-term investment - Donna Karan	33,140
	Cash		33,140
	(To record purchase of equity shares of Donna Karan )
Dec-31	Unrealised Loss	24,834
	Fair Value adjustment - trading		24,834
	To adjust the trading securities amount to $ 160,000)

Explanation:

The above journal entries can be explained as under $–$

In the transaction on Apr. 15, the shares of Ford Motor Company were sold for $ 29 per share less commission.

The sale amount will be calculated as under $–$

$\text{Selling }price=\left(\$\text{ 29 }X\text{ 8}00shares\right)\text{ - }\$\text{ 285}$

$\text{Selling }price=\$22,915$

Now, the gain will be calculated as under $–$

$\begin{array}{l}Gainonsaleofshares=Sellingprice-Purchaseprice\\ Gainonsaleofshares=\$22,915-\$20,925\\ Gainonsaleofshares=\$1,990\end{array}$

Cash has been debited as the cash has been received and gain on sale and shares of Ford Company are credited.

In the transaction on July 5, the shares of Z-Seven Company were sold for $ 10.25 per share less commission.

The sale amount will be calculated as under $–$

$\text{Selling }price=\left(\$\text{ 10}\text{.25 }X\text{ 750 }shares\right)\text{ - }\$\text{ 102}\text{.5}$

$\text{Selling }price=\$7,585$

Now, the gain will be calculated as under $–$

$\begin{array}{l}Gainonsaleofshares=Sellingprice-Purchaseprice\\ Gainonsaleofshares=\$7,585-\$5,825\\ Gainonsaleofshares=\$1,760\end{array}$

Cash has been debited as the cash has been received and gain on sale and shares of Z-Seven Company are credited.

In the transaction on July 22, the shares of Hunt Corp. were purchased for $ 30 per share add commission $ 444

The purchase price will be calculated as $–$

$Purchaseprice=\left(\$\text{ 30 }X\text{ 1,600 }shares\right)+\$\text{ 444}$

$Purchaseprice=\text{ \$ 48,444}$

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited.

In the transaction on Aug. 19, the shares of Donna Karan were purchased for $ 18.25 per share add commission $ 290.

The purchase price will be calculated as $–$

$Purchaseprice=\left(\$\text{ 18}\text{.25 }X\text{ 1,800 }shares\right)+\$\text{ 290}$

$Purchaseprice=\$33,140$

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited

In the transaction on Dec. 31, the prices of the shares purchased need to be adjusted to a Fair value of $ 160,000. The amount of gain or loss on the shares will be calculated as under

$Unrealisedgainor\left(loss\right)=Fairvalue–TotalCostoftheshares$

$\begin{array}{l}Unrealisedgainor\left(loss\right)=\text{ \$ 130,000 }–\text{ ( \$160,000 + \$97,928+\$33,140+\$48,444 +\$5,322)}\\ Unrealisedgainor\left(loss\right)=-\$24,834\end{array}$

Since, there is unrealised loss, we will credit the Fair value adjustment account and debit unrealised loss.

Note: The fair value adjustment of $ 5,322 is also considered since we had adjusted the prices of the shares of the last year as per the prevailing current prices of that time.

For the year 2019 $–$

Date	Accounts Titles and Descriptions	Debit ( in $ )	Credit ( in $ )
2019
Feb-27	Short-term investment - HCA	116,020
	Cash		116,020
	(To record purchase of equity shares of HCA )
Mar-03	Cash	39,750
	Loss on sale of Short term investment	8,694
	Short term investment - Hunt		48,444
	(To record sale of securities of Hunt)
Jun-21	Cash	91,980
	Loss on sale of Short term investment	5,948
	Short term investment - Lucent		97,928
	(To record sale of securities of Lucent)
Jun-30	Short term investment - Black & Decker	57,595
	Cash		57,595
	(To record purchase of equity shares of Black & Decker )
Nov-01	Cash	32,541
	Loss on sale of Short term investment	599
	Short term investment - Donna Karan		33,140
	(To record sale of securities of Lucent)
Dec-31	Unrealised Loss	18,449
	Fair value adjustment - Trading		18,449
	To adjust the trading securities amount to $ 180,000)

Explanation:

The above journal entries can be explained as under $–$

In the transaction on Feb. 27, the shares of HCA were purchased for $ 34 per share add commission $ 420

The purchase price will be calculated as $–$

$Purchaseprice=\left(\$\text{ 34 }X\text{ 3,400 }shares\right)+\$\text{ 420}$

$Purchaseprice=\text{ \$ 116,020}$

The shares have been purchased, thus they have been debited and they are purchased for cashthus, cash has been credited.

In the transaction on Mar. 3, the shares of Hunt Company were sold for $ 25 per share less commission.

The sale amount will be calculated as under $–$

$\text{Selling }price=\left(\$\text{25 }X\text{ 1,600 }shares\right)\text{ - }\$\text{ 250}$

$\text{Selling }price=\$39,750$

Now, the loss will be calculated as under $–$

$\begin{array}{l}Lossonsaleofshares=Sellingprice-Purchaseprice\\ Lossonsaleofshares=\$39,750-\$48,444\\ Lossonsaleofshares=\$8,694\end{array}$

Cash and loss on sale has been debited as the cash has been received and shares of Hunt Company are credited.

In the transaction on June 21, the shares of Lucent Company were sold for $ 42 per share less commission.

The sale amount will be calculated as under $–$

$\text{Selling }price=\left(\$4\text{2 }X\text{ 2,200 }shares\right)\text{ - }\$\text{ 420}$

$\text{Selling }price=\$91,980$

Now, the loss will be calculated as under $–$

$\begin{array}{l}Lossonsaleofshares=Sellingprice-Purchaseprice\\ Lossonsaleofshares=\$91,980-\$97,928\\ Lossonsaleofshares=\$5,948\end{array}$

Cash and loss on sale has been debited as the cash has been received and shares of Lucent Company are credited.

In the transaction on June 30, the shares of Black & Decker were purchased for $ 47.50 per share add commission $ 595

The purchase price will be calculated as $–$

$Purchaseprice=\left(\$\text{ 47}\text{.50 }X\text{ 1,200 }shares\right)+\$\text{ 595}$

$Purchaseprice=\text{ \$ 57,595}$

The shares have been purchased, thus they have been debited and they are purchased for cashthus, cash has been credited.

In the transaction on Nov. 1, the shares of Donna Karan were sold for $ 18.25 per share less commission.

The sale amount will be calculated as under $–$

$\text{Selling }price=\left(\$18.25X\text{ 1,800 }shares\right)\text{ - }\$309$

$\text{Selling }price=\$32,541$

Now, the loss will be calculated as under $–$

$\begin{array}{l}Lossonsaleofshares=Sellingprice-Purchaseprice\\ Lossonsaleofshares=\$32,541-\$33,140\\ Lossonsaleofshares=\$599\end{array}$

Cash and loss on sale has been debited as the cash has been received and shares of Donna Karan Company are credited.

In the transaction on Dec. 31, the prices of the shares purchased need to be adjusted to a Fair value of $ 180,000. The amount of gain or loss on the shares will be calculated as under

$Unrealisedgainor\left(loss\right)=Fairvalue–TotalCostoftheshares$

$\begin{array}{l}Unrealisedgainor\left(loss\right)=\text{ \$ 180,000 }–\text{ ( \$116,020 +\$57,595+\$24,834)}\\ Unrealisedgainor\left(loss\right)=-\$18,449\end{array}$

Since, there is unrealised loss, we will credit the Fair value adjustment account and debit unrealised loss.

Note: The fair value adjustment of $ 24,834 is also considered since we had adjusted the prices of the shares of the last year as per the prevailing current prices of that time.

Conclusion

Thus, all the journal entries for all the three years have been prepared.