Concept explainers
1.
Journalize the entries related to investment, in the books of Corporation J, assuming the portfolio as trading securities.
1.
Explanation of Solution
Trading securities (TS): The category of passive investments which are bought with a purpose to sell in the near future are referred to as trading securities. The percentage of passive investments in debt or equity will be less than 20%.
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 purchase of investment in TS.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2015 | ||||||
August | 4 | Investments in TS | 180,000 | |||
Cash | 180,000 | |||||
(To record purchase of investment in TS) |
Table (1)
Description:
- Investments in TS 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.
Prepare journal entry for adjusting the cost of TS to the fair market value, as on December 31, 2015.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2015 | ||||||
December | 31 | Net Unrealized Gains (Losses) | 10,000 | |||
Investments in TS | 10,000 | |||||
(To record the adjustment of cost of investment in TS to the fair value) |
Table (2)
Description:
- Net Unrealized Gains (Losses) 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 decrease stockholders’ equity value, a decrease in stockholders’ equity value is debited. This loss is reported as loss under net income.
- Investments in TS is an asset account. The account is credited because the market price was decreased, and eventually the asset value decreased.
Working Notes:
Determine the unrealized gain or loss on investment in TS.
Step 1: Compute the fair value of investment on December 31, 2015.
Step 2: Compute unrealized gain or loss on investment in TS.
Note: Refer to Equation (1) for value and computation of fair value of investment on December 31, 2015.
Prepare journal entry for cash dividend received in 2016.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2016 | ||||||
June | 1 | Cash | 7,000 | |||
Dividend Revenue | 7,000 | |||||
(To record receipt of dividend) |
Table (3)
Description:
- 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.
Prepare journal entry for adjusting the TS to the fair market value, as on December 31, 2016.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2016 | ||||||
December | 31 | Investments in TS | 12,000 | |||
Net Unrealized Gains (Losses) | 12,000 | |||||
(To record the adjustment of investment in TS to the fair value) |
Table (4)
Description:
- Investments in TS is an asset account. The account is debited because the market price was increased, and eventually the asset value increased.
- Net Unrealized Gains (Losses) is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, an increase in stockholders’ equity value is credited. This gain is reported as gain under net income.
Working Notes:
Determine the unrealized gain or loss on investment on December 31, 2016.
Step 1: Compute the fair value of investment on December 31, 2016.
Step 2: Compute unrealized gain or loss on investment in TS.
Note: Refer to Equations (3) and (1) for both the values.
Prepare journal entry for cash dividend received in 2017.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2017 | ||||||
June | 1 | Cash | 7,000 | |||
Dividend Revenue | 7,000 | |||||
(To record receipt of dividend) |
Table (5)
Description:
- 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.
Note: Refer to Equation (2) for value and computation of dividend revenue.
Prepare journal entry for adjusting the TS to the fair market value, as on December 31, 2017.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2017 | ||||||
December | 31 | Investments in TS | 6,000 | |||
Net Unrealized Gains (Losses) | 6,000 | |||||
(To record the adjustment of investment in TS to the fair value) |
Table (6)
Description:
- Investments in TS is an asset account. The account is debited because the market price was increased, and eventually the asset value increased.
- Net Unrealized Gains (Losses) is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, an increase in stockholders’ equity value is credited. This gain is reported as gain under net income.
Working Notes:
Determine the unrealized gain or loss on investment on December 31, 2017.
Step 1: Compute the fair value of investment on December 31, 2017.
Step 2: Compute unrealized gain or loss on investment in TS.
Note: Refer to Equations (4) and (3) for both the values.
2.
Journalize the entries related to investment, in the books of Corporation J, assuming the portfolio as available-for-sale securities.
2.
Explanation of Solution
Available-for-sale (AFS) securities: The category of passive investments which are held as idle funds to serve the future operating and strategic purposes, are referred to as available-for-sale securities. The percentage of passive investments in debt or equity will be less than 20%.
Prepare journal entry for purchase of investment in AFS securities.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2015 | ||||||
August | 4 | Investments in AFS Securities | 180,000 | |||
Cash | 180,000 | |||||
(To record purchase of investment in AFS securities) |
Table (7)
Description:
- Investments in AFS Securities 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.
Prepare journal entry for adjusting the cost of AFS securities to the fair market value, as on December 31, 2015.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2015 | ||||||
December | 31 | Net Unrealized Gains (Losses) | 10,000 | |||
Investments in AFS Securities | 10,000 | |||||
(To record the adjustment of cost of investment in AFS securities to the fair value) |
Table (8)
Description:
- Net Unrealized Gains (Losses) 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 decrease stockholders’ equity value, a decrease in stockholders’ equity value is debited. This loss is reported as component of Other Comprehensive Income (OCI) on the Statement of Comprehensive Income.
- Investments in AFS Securities is an asset account. The account is credited because the market price was decreased, and eventually the asset value decreased.
Working Notes:
Determine the unrealized gain or loss on investment in AFS securities.
Step 1: Compute the fair value of investment on December 31, 2015.
Step 2: Compute unrealized gain or loss on investment in AFS securities.
Note: Refer to Equation (5) for value and computation of fair value of investment on December 31, 2015.
Prepare journal entry for cash dividend received in 2016.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2016 | ||||||
June | 1 | Cash | 7,000 | |||
Dividend Revenue | 7,000 | |||||
(To record receipt of dividend) |
Table (9)
Description:
- 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.
Note: Refer to Equation (2) for value and computation of dividend revenue.
Prepare journal entry for adjusting the AFS securities to the fair market value, as on December 31, 2016.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2016 | ||||||
December | 31 | Investments in AFS Securities | 12,000 | |||
Net Unrealized Gains (Losses) | 12,000 | |||||
(To record the adjustment of investment in AFS securities to the fair value) |
Table (10)
Description:
- Investments in AFS Securities is an asset account. The account is debited because the market price was increased, and eventually the asset value increased.
- Net Unrealized Gains (Losses) is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, an increase in stockholders’ equity value is credited. This gain is reported as component of Other Comprehensive Income (OCI) on the Statement of Comprehensive Income.
Working Notes:
Determine the unrealized gain or loss on investment on December 31, 2016.
Step 1: Compute the fair value of investment on December 31, 2016.
Step 2: Compute unrealized gain or loss on investment in AFS securities.
Note: Refer to Equations (6) and (5) for both the values.
Prepare journal entry for cash dividend received in 2017.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2017 | ||||||
June | 1 | Cash | 7,000 | |||
Dividend Revenue | 7,000 | |||||
(To record receipt of dividend) |
Table (11)
Description:
- 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.
Note: Refer to Equation (2) for value and computation of dividend revenue.
Prepare journal entry for adjusting the AFS securities to the fair market value, as on December 31, 2017.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2017 | ||||||
December | 31 | Investments in AFS Securities | 6,000 | |||
Net Unrealized Gains (Losses) | 6,000 | |||||
(To record the adjustment of investment in AFS securities to the fair value) |
Table (12)
Description:
- Investments in AFS Securities is an asset account. The account is debited because the market price was increased, and eventually the asset value increased.
- Net Unrealized Gains (Losses) is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, an increase in stockholders’ equity value is credited. This gain is reported as component of Other Comprehensive Income (OCI) on the Statement of Comprehensive Income.
Working Notes:
Determine the unrealized gain or loss on investment on December 31, 2017.
Step 1: Compute the fair value of investment on December 31, 2017.
Step 2: Compute unrealized gain or loss on investment in AFS securities.
Note: Refer to Equations (7) and (6) for both the values.
3.
Journalize the entries related to equity method investment, in the books of Corporation J, assuming the portfolio as investment in stock for significant influence.
3.
Explanation of Solution
Investments in stock for significant influence: The investments in stock securities which claim significant influence with an ownership of 20% to 50% in the outstanding stock of the affiliate, are referred to as investments in stock for significant influence.
Equity method: The method of accounting such investments is referred to as equity method. Investments under equity method are valued and reported, at a proportionate value of increase in investment value when affiliate reports net income, and decrease in investment value when affiliate declares dividends.
Prepare journal entry to record the purchase of investment.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2015 | ||||||
August | 4 | Investments in Affiliates | 180,000 | |||
Cash | 180,000 | |||||
(To record the purchase of equity-method investment) |
Table (13)
Description:
- Investments in Affiliates is an asset account. Since 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.
Prepare journal entry for share of income received from Company K in 2015.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2015 | ||||||
December | 31 | Investments in Affiliates | 9,000 | |||
Equity in Affiliate Earnings | 9,000 | |||||
(To record income received from affiliates) |
Table (14)
Description:
- Investments in Affiliates is an asset account. Since share of income received from investee increases the investment value, asset value increased, and an increase in asset is debited.
- Equity in Affiliate Earnings is a revenue account. Revenues increase stockholders’ equity value, and an increase in stockholders’ equity is credited.
Working Notes:
Compute amount of income received from Company K.
Prepare journal entry for dividends received from affiliate, in 2016.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2016 | ||||||
June | 1 | Cash | 7,000 | |||
Investments in Affiliates | 7,000 | |||||
(To record dividends received from investee) |
Table (15)
Description:
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Investments in Affiliates is an asset account. Since stock investments are reduced as an effect of receipt of dividends, asset value decreased, and a decrease in asset is credited.
Note: Refer to Equation (2) for value and computation of dividend revenue.
Prepare journal entry for share of income received from Company K in 2016.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2016 | ||||||
December | 31 | Investments in Affiliates | 9,000 | |||
Equity in Affiliate Earnings | 9,000 | |||||
(To record income received from affiliates) |
Table (16)
Description:
- Investments in Affiliates is an asset account. Since share of income received from investee increases the investment value, asset value increased, and an increase in asset is debited.
- Equity in Affiliate Earnings is a revenue account. Revenues increase stockholders’ equity value, and an increase in stockholders’ equity is credited.
Note: Refer to Equation (8) for value and computation of investment revenue.
Prepare journal entry for dividends received from affiliate, in 2017.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2017 | ||||||
June | 1 | Cash | 7,000 | |||
Investments in Affiliates | 7,000 | |||||
(To record dividends received from investee) |
Table (17)
Description:
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Investments in Affiliates is an asset account. Since stock investments are reduced as an effect of receipt of dividends, asset value decreased, and a decrease in asset is credited.
Note: Refer to Equation (2) for value and computation of dividend revenue.
Prepare journal entry for share of income received from Company K in 2017.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
2017 | ||||||
December | 31 | Investments in Affiliates | 9,000 | |||
Equity in Affiliate Earnings | 9,000 | |||||
(To record income received from affiliates) |
Table (18)
Description:
- Investments in Affiliates is an asset account. Since share of income received from investee increases the investment value, asset value increased, and an increase in asset is debited.
- Equity in Affiliate Earnings is a revenue account. Revenues increase stockholders’ equity value, and an increase in stockholders’ equity is credited.
Note: Refer to Equation (8) for value and computation of investment revenue.
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Chapter A Solutions
FINANCIAL ACCOUNTING + CONNECT PLUS
- The investments of Steelers Inc. include a single investment: 33,100 shares of Bengals Inc. common stock purchased on September 12, 2016, for 13 per share including brokerage commission. These shares were classified as available-for-sale securities. As of the December 31, 2016, 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, 2016. b. How is the unrealized gain or loss for available-for-sale investments disclosed on the financial statements?arrow_forwardOBrien Industries Inc. is a book publisher. The comparative unclassified balance sheets for December 31, 2017 and 2016 follow. Selected missing balances are shown by letters. Note 1. Investments are classified as available for sale. The investments at cost and fair value on December 31, 2016, are as follows: Note 2. The investment in Jolly Roger Co. stock is an equity method investment representing 30% of the outstanding shares of Jolly Roger Co. The following selected investment transactions occurred during 2017: May 5. Purchased 3,080 shares of Gozar Inc. at 30 per share including brokerage commission. Gozar Inc. is classified as an available-for-sale security. Oct. 1. Purchased 40,000 of Nightline Co. 6%, 10-year bonds at 100. The bonds are classified as available for sale. The bonds pay interest on October 1 and April 1. 9. Dividends of 12,500 are received on the Jolly Roger Co. investment. Dec. 31. Jolly Roger Co. reported a total net income of 112,000 for 2017. OBrien Industries Inc. recorded equity earnings for its share of Jolly Roger Co. net income. 31. Accrued three months of interest on the Nightline bonds. 31. Adjusted the available-for-sale investment portfolio to fair value, using the following fair value per-share amounts: 31. Closed the OBrien Industries Inc. net income of 146,230. OBrien Industries Inc. paid no dividends during the year. Instructions Determine the missing letters in the unclassified balance sheet. Provide appropriate supporting calculations.arrow_forward
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