Fundamental Accounting Principles -Hardcover
Fundamental Accounting Principles -Hardcover
22nd Edition
ISBN: 9780077632991
Author: Wild
Publisher: MCG
Question
Book Icon
Chapter 15, Problem 3BPSB
To determine

Expert Solution & Answer
Check Mark

Answer to Problem 3BPSB

Explanation of Solution

Introduction:

Available-for-sale (AFS) securities are securities/shares which are purchased to earn dividend, interest or to increase fair market value. When these securities are sold in the short term, then they become short term investments else they are considered as long term investments.

To determine:

1. Journal entries to record the transaction and events.
2. A table summarizing (a) total cost, (b) total fair value adjustment and (c) total fair Value.
3. A table summarizing (A) the realized gains and losses, (b) the unrealized gains or losses

Solution:

1. The required journal entries and adjustment entries are shown in the explanation section.
2. The calculation is shown in the explanation section.
3. The calculation is shown in the explanation section

Explanation:

1. The required journal entries and adjustment entries are as follows:

Entries to record purchase of shares:

    DateParticularsDebit($)Credit($)
    10.03.2015
    Long term investment (A)
    31400


    Cash
    (To record shares purchased)

    31400
    07.04.2015
    Long term investment- F Company
    57283


    Cash
    (To record shares purchased)

    57283
    01.09.2015
    Long term investments (M company)
    29090


    Cash
    (To record shares purchased)

    29090
    02.06.2016
    Long term investments- D company
    35700


    Cash
    (Purchase of shares)

    35700
    14.06.2016
    Long term investments (S company)
    25480


    Cash
    (Purchase of shares)

    25480
    28.01.2016
    Long term investment-C company
    41480


    Cash
    (Purchase of shares)

    41480
    03.09.2016
    Long term investments-(M Company)
    84780


    Cash
    (Purchase of shares)

    84780

Working notes:
Calculation of Purchases: We use the formula mentioned below:

  Purchases=(Number of shares * Price/Unit)+Commision

    DateNumber of SharesPrice per unitCommissionPurchases
    10.03.2015
    1200
    $25.50
    $800
    $31400
    07.04.2015
    2500
    $22.50
    $1033
    $57283
    01.09.2015
    600
    $47
    $890
    $29090
    02.06.2016
    1800
    $19.25
    $1050
    $35700
    14.06.2016
    1200
    $21
    $280
    $25480
    28.01.2016
    1000
    $40
    $1480
    $41480
    03.09.2016
    3000
    $28
    $780
    $84780

The Fair Value adjustment entry is as follows:

    DateParticularsDebit($)Credit($)




    31.12.2015
    Unrealized loss −(Equity)
    2873


    Fair Value adjustment-AFS(LT)


    2873
    31.12.2016
    Fair Value Adjustment-AFS(LT)
    5093


    Unrealized Loss-Equity

    2873

    Unrealized Gain-Equity

    2220
    31.12.2017
    Unrealized Gain-Equity
    2220


    Unrealized Loss-Equity
    6260


    Fair Value Adjustment −AFS(LT)

    8480

Calculation of cost and fair value:

    DetailsCostFV
    A
    $31400
    33000(1200*$27.50)
    F
    57283
    52500(2500*$21)
    P
    29090
    29400(600*$49)
    Total
    117773
    114900

FV Adjustment = Cost- Value

=$117773$114900=$2873

Calculation of cost and fair value:

    DetailsCostFV
    A
    31400
    34800(1200*$29)
    D
    35700
    32400(1800*$18)
    S
    25480
    27600(1200*$23)
    Total
    92580
    94800

Calculation of cost and fair value:

    C
    41480
    48000(1000*$48)
    M
    84780
    72000(3000*$24)
    Total
    126260
    120000



FV Adjustment = Cost- Value

  =$126260$120000=$6260

Calculation of required balance:
FV adjustment= Required balance+ unadjusted balance

                         =$2220+$2873=$5093                       =$6260+$2220=$8480

Entries to record the sale of shares:

    DateParticularsDebit($)Credit($)
    15.04.2016
    Cash
    50043


    Loss on sale of Short term investment
    7240


    Long term investments(J&J)

    57283
    27.11.2016
    Cash
    29755


    Gain on sale of investments

    29090

    Long term investments

    655
    22.08.2016
    Cash
    23950


    Loss on sale of investments
    7450


    Long term investments − S Company

    31400
    09.10.2016
    Cash
    28201


    Loss on sale of investments

    2721

    Long term investments-AFS Company

    25480
    31.10.2016
    Cash
    26102


    Gain on sale of investments

    9598

    Long term investment-E Company

    35700




Calculation of Sales received from shares:
We use the formula mentioned below:

  Sales=(Number of shares * Price/Unit)Commision

    DateNumber of SharesPrice/unitCommissionSales
    15.04.2016
    2500
    $20.50
    $1207
    $50043
    22.08.2016
    1200
    $21.50
    $1850
    $23950
    09.10.2016
    1200
    $24
    $599
    $28201
    31.10.2016
    1800
    $15
    $898
    $26102





2. The following table summarizes cost; fair value adjustment and fair value of portfolio on long term AFS at the end of given three years:

    Particulars31.12.2015 ($)31.12.2016($)31.12.2017($)
    Long term AFS securities (Cost)
    117773
    92580
    126260
    Less: Fair Value adjustment
    (2873)
    2220
    (6260)
    Long term AFS securities (Fair Value)
    114900
    94800
    120000




3. Statement showing realized and unrealized gains or loss at the end of given three years:

    Particulars2015($)2016($)2017($)
    Realized Gains(Losses)



    Sales of F Shares

    (7240)

    Sale of P shares

    665

    Sale of D shares


    (9598)
    Sale of A Shares


    (7450)
    Sale of S shares


    2721
    Total realized Gain(Loss)
    0
    (6575)
    14327
    Unrealized gain(Loss)
    (2873)
    2220
    (6260)

The unrealized gain is equal to the fair value adjustment.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 15 Solutions

Fundamental Accounting Principles -Hardcover

Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
FINANCIAL ACCOUNTING
Accounting
ISBN:9781259964947
Author:Libby
Publisher:MCG
Text book image
Accounting
Accounting
ISBN:9781337272094
Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:Cengage Learning,
Text book image
Accounting Information Systems
Accounting
ISBN:9781337619202
Author:Hall, James A.
Publisher:Cengage Learning,
Text book image
Horngren's Cost Accounting: A Managerial Emphasis...
Accounting
ISBN:9780134475585
Author:Srikant M. Datar, Madhav V. Rajan
Publisher:PEARSON
Text book image
Intermediate Accounting
Accounting
ISBN:9781259722660
Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:McGraw-Hill Education
Text book image
Financial and Managerial Accounting
Accounting
ISBN:9781259726705
Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:McGraw-Hill Education