Chapter 15, Problem 4BP

1.

To determine

Prepare the journal entries to record the given transactions.

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Prepare the journal entries to record the given transactions as follows:

Date	Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
February 6,	Stock Investments in company N (1)		139,400
	Cash			139,400
	(To record the  Purchase of  3,400 shares of Company N in cash)
April 7,	Stock Investments in Company D (2)		46,800
	Cash			46,800
	(To record 1,200 shares of company D purchased in cash)
June 2,	Stock Investments in company M (3)		180,000
	Cash			180,000
	(To record 2,500 shares of Company M purchased in cash)
June 30,	Cash		3,400
	Dividend revenue (4)			3,400
	(To record dividend revenue received from Company N)
August 11,	Cash (5)		39,100
	Stock Investments in Company N (7)			4,250
	Gain on Sale of Stock Investments  (6)			34,850
	(To record sales made 850 shares at the rate of $46 per share)
August 24,	Cash		120
	Dividend Revenue (8)			120
	(To record dividend revenue received from Company D in cash)
November 9,	Cash		3,825
	Dividend Revenue (9)			3,825
	(To record dividend revenue received from Company N in cash)
December 18,	Cash		180
	Dividend Revenue (10)			180
	(To record dividend revenue received from Company D in cash)

Table (1)

Working note:

Calculate the purchased value of stock investment (Company N)

$\begin{array}{c}\text{Stock investment =}\left(\text{Number of shares}\times \text{Price per share}\right)\\ =\left(3,400\times \$41\text{per}\text{share}\right)\\ =\$139,400\end{array}$ (1)

Calculate the purchased value of stock investment (Company D)

$\begin{array}{c}\text{Stock investment =}\left(\text{Number of shares}\times \text{Price per share}\right)\\ =\left(1,200\times \$39\text{per}\text{share}\right)\\ =\$46,800\end{array}$ (2)

Calculate the purchased value of stock investment (Company M)

$\begin{array}{c}\text{Stock investment = }\left[\begin{array}{l}\left(\text{Number of shares}\times \text{Price per share}\right)\\ +\text{Brokerage fee}\end{array}\right]\\ =\left(2,500\times \$72\text{per}\text{share}\right)\\ =\$180,000\end{array}$ (3)

Calculate the dividend revenue received from Company N

$\begin{array}{c}\text{Dividends = }\left(\text{Number of shares}\times \text{Dividend per share}\right)\\ =\left(3,400\times \$1\text{per}\text{share}\right)\\ =\$3,400\end{array}$ (4)

Calculate the value of cash received from the sale of stock investment (Company N stocks)

$\begin{array}{c}\text{Cash received = }\left(\begin{array}{l}\text{Number of shares sold}\times \\ \text{Sales price per share}\end{array}\right)\\ =\left(850\times \$46\right)\\ =\$39,100\end{array}$ (5)

Calculate the purchase value of long-term investment for 850 shares of Company N

$\begin{array}{c}\text{Purchase value = }\left(\begin{array}{l}\frac{\text{Cost of investment for 4,000 shares (1)}}{\text{Number of shares invested}}\times \\ \text{Number of shares sold}\end{array}\right)\\ =\left[\frac{\$139,400}{3,400}\times 850\right]\\ =\$34,850\end{array}$ (6)

Calculate the gain (loss) from sale of stock investment.

$\begin{array}{c}\begin{array}{l}\text{Gain }\left(\text{loss}\right)\\ \text{on investments}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Cash received (5) –}\\ \text{Purchase value (6)}\end{array}\right\}\\ \text{= \$39,100}-\$34,850\\ =\$4,250\end{array}$ (7)

Calculate the dividend revenue received from Company D

$\begin{array}{c}\text{Dividends = }\left(\text{Number of shares}\times \text{Dividend per share}\right)\\ =\left(1,200\times \$0.10\text{per}\text{share}\right)\\ =\$120\end{array}$ (8)

Calculate the dividend revenue received from Company N

$\begin{array}{c}\text{Dividends}=\left(\text{Number of shares purchase}-\text{Sold}\times \text{Dividend per share}\right)\\ =\left(3,400-850\times \$1.50\text{per}\text{share}\right)\\ =\$3,825\end{array}$ (9)

Calculate the dividend revenue received from Company D

$\begin{array}{c}\text{Dividends = }\left(\text{Number of shares}\times \text{Dividend per share}\right)\\ =\left(1,200\times \$0.15\text{per}\text{share}\right)\\ =\$180\end{array}$ (10)

2.

To determine

Prepare a table to compare the year-end cost and fair value of Company S’s stock investments in available-for sale securities.

Explanation of Solution

Prepare a table to compare the year-end cost and fair value of Company S’s stock investments in available-for sale securities as follows:

Name of the company	Cost of stock investment	Fair value of stock investment	Unrealized gain or (loss)
Company N	$104,550 (12)	$102,000 (13)
Company D	$46,800 (2)	$49,200 (14)
Company M	$180,000 (3)	$147,500 (15)
Totals	$331,350	$298,700	$(32,650) (16)

Table (2)

Working note:

Calculate the cost of investment – Company N

$\begin{array}{c}\text{Cost of investment = }\left[\begin{array}{l}\text{Cost of 3,400 shares (1)}-\\ \text{Cost of 350 shares (6)}\end{array}\right]\\ \text{=\$139,400}-\$34,850\\ =\$104,550\end{array}$ (12)

Calculate the fair value of stock investment of Company N

$\begin{array}{c}\text{Short-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(2,550\times \$40\text{per}\text{share}\right)\\ =\$102,000\end{array}$ (13)

Calculate the fair value of stock investment of Company F

$\begin{array}{c}\text{Short-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(1,200\times \$41\text{per}\text{share}\right)\\ =\$49,200\end{array}$ (14)

Calculate the fair value of stock investment of Company M

$\begin{array}{c}\text{Short-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(2,500\times \$59.00\text{per}\text{share}\right)\\ =\$147,500\end{array}$ (15)

Calculate the value of unrealized gain or loss

$\begin{array}{c}\text{Short-term investment = }\left(\text{Total Fair value}-\text{Total cost of investment}\right)\\ =\left(\$298,700-\$331,350\right)\\ =\$(32,650)\end{array}$ (16)

3.

To determine

Prepare an adjusting entry, if necessary, to record the year-end fair value adjustment for the portfolio of stock investments in available-for-sale securities.

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and expenses during the period in which they actually occurs.

Prepare an adjusting entry, if necessary, to record the year-end fair value adjustment for the portfolio of stock investments in available-for-sale securities as follows:

Adjusting entry for unrealized loss:

Date	Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
December, 31	Unrealized loss - Equity		32,650
	Fair value adjustment			32,650
	(To record the  adjustment entry for unrealized loss at the end of the accounting year )

Table (3)

• Unrealized Loss–Equity is an adjustment account to report the investment at fair market value. Since loss has occurred while adjusting; therefore, debit the unrealized Gain or Loss–Equity account with $32,650.
• Fair Value Adjustment is a contra-asset account. The account shows a credit balance since the market price has decreased (loss); therefore, credit the fair value adjustment with $32,650.

4.

To determine

Explain the manner in which the fair value adjustment of Company S’s stock investment is presented in the balance sheet.

Explanation of Solution

Explain the manner in which the fair value adjustment of Company S’s stock investment is presented in the balance sheet as follows:

Cost of stock investment in available-for-sale securities of $331,350 is reported in the assets side of the balance sheet and unrealized loss of $32,650 is subtracted from the cost of investment for the fair value adjustment. Net fair value of $298,700 $\left[\$331,350-\$32,650\right]$ is treated as the current assets of the company; because Company S has invested in the stock securities and it would be reported in the balance sheet based on the fair (market) value of the portfolio of trading securities.

5.

To determine

Explain the manner in which the stock investments affect Company S’s

1. a. Income statement for the year , and
2. b. The equity section of the balance sheet at year ended.

Explanation of Solution

Explain the manner in which the stock investments affect Company S’s income statement for the year, and the equity section of the balance sheet at year ended as follows:

(a)    Income statement:

• Unrealized Loss-Interest Revenue, $32,650
• Dividend Revenue, $7,525 (17)
• Gain on Sale of Stock Investments, $4,250
• Net effect on income is $20,875

(b)    Equity section of Balance sheet

• Decrease to equity from the $20,875 decrease in income.

Working note:

Calculate the value of total dividend revenue received:

$\begin{array}{c}\text{Tota dividends revenue = }\left(\begin{array}{l}\text{Dividend received from Company N+}\\ \text{Dividend received from Company D}\end{array}\right)\\ =\left(\$3,400+\$120\right)+\left(\$3,825+\$180\right)\\ =\$3,520+\$4,005\\ =\$7,525\end{array}$ (17)