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

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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 2PB
Textbook Problem
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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:

Chapter 15, Problem 2PB, Zeus Investments Inc. is a regional investment company that began operations on January 1, Year 1. , example  1

Chapter 15, Problem 2PB, Zeus Investments Inc. is a regional investment company that began operations on January 1, Year 1. , example  2

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

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

Explanation of Solution

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.

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

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
February14Investments–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.

  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.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
April1Investments–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.

  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.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
June1Cash 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.

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.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
June27Cash 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.

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)

  • 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.

SecurityNumber of Shares×Fair Market Value=Fair Market Value of Investment
Company AP4,200 shares×$33

(2)

To determine

Indicate the presentation of trading investments on the current assets section of the balance sheet.

(3)

To determine

Discuss the reporting of trading investments on the financial statements.

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