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The investments of Steelers Inc. include a single investment: 33,100 shares of Bengals Inc. common stock purchased on September 12, Year 1, for $13 per share including brokerage commission. These shares were classified as available-for-sale securities. As of the December 31, Year 1, 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, Year 1. b. How is the unrealized gain or loss for available-for-sale investments disclosed on the financial statements?

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 15, Problem 20E
Textbook Problem
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The investments of Steelers Inc. include a single investment: 33,100 shares of Bengals Inc. common stock purchased on September 12, Year 1, for $13 per share including brokerage commission. These shares were classified as available-for-sale securities. As of the December 31, Year 1, balance sheet date, the share price declined to $11 per share.

  1. a. Journalize the entries to acquire the investment on September 12 and record the adjustment to fair value on December 31, Year 1.
  2. b. How is the unrealized gain or loss for available-for-sale investments disclosed on the financial statements?

(a)

To determine

Journalize the stock investment transactions in the books of Company S.

Explanation of Solution

Available-for-sale securities: These are short-term or long-term investments in debt and equity securities with an intention of holding the investment for some strategic purposes like meeting liquidity needs, or manage interest risk.

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.

Prepare journal entry for the purchase of 33,100 shares of Company B, at $13 per share.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
September12Investments–Company B Stock 430,300 
           Cash  430,300
  (To record purchase of shares for cash)   

Table (1)

  • Investments–Company B 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 B’s stock...

(b)

To determine

Discuss the reporting of available-for-sale investments on the financial statements.

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Chapter 15 Solutions

Financial Accounting
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