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Glacier Products Inc. is a wholesaler of rock climbing gear. The company began operations on January 1, Year 1. The following transactions relate to securities acquired by Glacier Products Inc., which has a fiscal year ending on December 31: Instructions 1. Journalize the entries to record the preceding transactions. 2. Prepare the investment-related asset and stockholders’ equity balance sheet presentation for Glacier Products Inc. on December 31, Year 2, assuming that the Retained Earnings balance on December 31, Year 2, is $700,000.

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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 3PB
Textbook Problem
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Glacier Products Inc. is a wholesaler of rock climbing gear. The company began operations on January 1, Year 1. The following transactions relate to securities acquired by Glacier Products Inc., which has a fiscal year ending on December 31:

Chapter 15, Problem 3PB, Glacier Products Inc. is a wholesaler of rock climbing gear. The company began operations on January

Instructions

  1. 1. Journalize the entries to record the preceding transactions.
  2. 2. Prepare the investment-related asset and stockholders’ equity balance sheet presentation for Glacier Products Inc. on December 31, Year 2, assuming that the Retained Earnings balance on December 31, Year 2, is $700,000.

(1)

To determine

Journalize the stock investment transactions for Company G.

Explanation of Solution

Equity investments: Equity investments are stock instruments which claim ownership in the investee company and pay a dividend revenue to the investor company.

Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.

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 9,000 shares of Company M, at $40 per share.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
January18Investments–Company M Stock 360,000 
           Cash  360,000
  (To record purchase of shares for cash)   

Table (1)

  • Investments–Company M 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 M’s stock.

  Cash paid = (Number of shares purchased× Price per share)(9,000 shares ×$40)= $360,000

Prepare journal entry for the dividend received from Company M for 9,000 shares.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
July22Cash 27,000 
           Dividend Revenue  27,000
  (To record receipt of dividend revenue)   

Table (2)

  • 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 M’s stock.

Dividend received = Number of shares ×Dividend per share= 9,000 shares ×$3= $27,000

Prepare journal entry for sale of 500 shares of Company M, at $58, with a brokerage of $100.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
October5Cash 28,900 
         Gain on Sale of Investments  8,900
         Investments–Company M Stock  20,000
  (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.
  • Gain 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 M 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}(500 shares ×$58)$100= $28,900

Step 2: Compute cost of stock investment sold.

Cost of stock investment sold} = Number of shares sold × Cost price per share= 500 shares ×$40= $20,000

Step 3: Compute realized gain (loss) on sale of stock.

Realized gain (loss)on investments} = {Cash received –Cost of stock investment }= $28,900–$20,000= $8,900

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 M for 8,500 shares.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
Year 1    
December18Cash 25,500 
           Dividend Revenue  25,500
  (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 M’s stock.

Dividend received = Number of shares ×Dividend per share(9,000–500) shares ×$3= $25,500

Prepare adjusting entry for valuation of available-for-sale securities transaction.

Table (5)

  • Unrealized Gain (Loss) on Available-for-Sale 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 reduce stockholders’ equity value, and a decrease in stockholders’ equity value is debited.
  • Valuation Allowance for Available-for-Sale Investments is a contra-asset account. The account is credited because the market price was decreased (loss) to $306,000 from the cost of $340,000

(2)

To determine

Indicate the presentation of available-for-sale investments, equity method investments, and stockholders’ equity on the balance sheet as on December 31, Year 2.

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