Chapter A2, Problem 27E

To determine

(a)

Introduction:

Investment in debt security (available for sale securities and trading securities) as well as equity securities is recorded using Fair Value Method.

To record:

Journal entries if the securities are trading securities.

Answer to Problem 27E

Journal Entries

Date	S. No.	Particulars	Debit ($)	Credit ($)
Date Not given	a.	Investment − Trading Securities Dr. Cash (Being Trading Securities of ‘B’ stock purchased.)	12,800	12,800
Date Not given	b.	Cash Dr. Dividend Income (Being dividend received on trading securities.)	320	320
Date Not given	c.	Cash Dr. Loss on Sale of Investments Investments − Trading Securities (Being Trading Securities sold.)	2,440 120	2,560
Date Not given	d.	Investment − Trading Securities Dr. Cash (Being Trading Securities of ‘N’ stock purchased.)	20,900	20,900
Date Not given	e.	Cash Dr. Dividend Income (Being dividend received on trading securities.)	380	380

Explanation of Solution

a. No. of shares = 200

Acquisition Cost = $12,800

Acquisition Cost per share = $\frac{\$12,800}{200}$ = $64

b. No. of shares = 200

Dividend per share = $1.60

Total Dividend received = $200\times \$1.60$ = $320

c. No. of shares sold = 40

Selling Price per share = $61

Selling Price for 40 shares = $40\times \$61$ = $2,440

Acquisition Cost per share = $64

Acquisition Cost of 40 shares = $40\times \$64$ = $2,560

Loss on Sale of Investment = Acquisition Cost of 40 shares - Selling Price for 40 shares

Loss on Sale of Investment = $2,560 - $2,440 = $120

d. No. of shares = 380

Acquisition Cost = $20,900

Acquisition Cost per share = $\frac{\$20,900}{380}$ = $55

e. No. of shares = 380

Dividend per share = $1

Total Dividend received = $380\times \$1$ = $380.

To determine

(b)

Introduction:

Investment in debt security (available for sale securities and trading securities) as well as equity securities is recorded using Fair Value Method.

To calculate:

Fair Value of the portfolio.

Answer to Problem 27E

The Fair Value of portfolio on December 31 would be $32,020.

Explanation of Solution

Company	No. of Shares	Market Value Per Share	Fair Value (Market Value)
B	160	$60	$160\times \$60$ = $9,600
N	380	$59	$380\times \$59$ = $22,420
Total	540		$32,020

200 shares of ‘B’ stock were purchased, although (later) 40 were sold.

Currently, the company holds 160 shares (i.e. 200 shares − 40 shares).

To determine

(c)

Introduction:

Investment in debt security (available for sale securities and trading securities) as well as equity securities is recorded using Fair Value Method.

To prepare:

Adjusting entry on December 31.

Answer to Problem 27E

Adjusting entry to record ‘Available for Sale Securities’ at market value

Date	Particulars	Debit ($)	Credit ($)
Dec 31, 2020	Allowance to Adjust Available for Sale Securities to Market Dr. Unrealized Gain on Trading Securities	880	880

Explanation of Solution

Securities	Acquisition Cost (1)	Fair Value at Dec 31, 2020 (2)	Difference [(2) − (1)]
B	$10,240	$9,600	(640)
N	$20,900	$22,420	$1,520
Total	$31,140	$32,020	880

Net Investments in ‘B’ is 160 shares.

Acquisition Cost per share = $64

Acquisition Cost of 160 shares = $160\times \$64$ = $10,240.

To determine

(d)

Introduction:

Investment in debt security (available for sale securities and trading securities) as well as equity securities is recorded using Fair Value Method.

To show:

Effect on Income Statement due to the adjusting entry.

Answer to Problem 27E

‘Unrealized Gain on Trading Securities’ of $880 will increase the net income at the end of the year.

Explanation of Solution

Securities	Acquisition Cost (1)	Fair Value at Dec 31, 2020 (2)	Difference [(2) − (1)]
B	$10,240	$9,600	(640)
N	$20,900	$22,420	$1,520
Total	$31,140	$32,020	880

Total Dividend Income = $320 + $380 = $700

1. The change in total value of trading securities and available for sale securities is calculated.
2. If the Fair Value is more than Acquisition Cost then the increase in value is shown as ‘Unrealized Gain on Trading Securities’ or ‘Unrealized Gain on Available for Sale Securities’.
3. If the Fair Value is less than Acquisition Cost then the decrease in value is shown as ‘Unrealized Loss on Trading Securities’ or ‘Unrealized Loss on available for sale securities’.
4. ‘Unrealized Gain’ on both is added in book value of investment on the balance sheet so that it results in the fair market value of the investment whereas ‘Unrealized Loss’ is deducted from the book value of investment.
5. ‘Unrealized Gain on Trading Securities’ or ‘Unrealized Loss on Trading Securities’ is shown on the Income Statement under the head ‘Other Income’ or ‘Other Loss’, respectively.
6. ‘Unrealized Gain on Available for Sale Securities’ or ‘Unrealized Loss on Available for Sale Securities’ is shown as part of ‘Accumulated Other Comprehensive Income’ in the stockholders’ equity as separate head. It doesn’t affect the Income Statement, instead affects the stockholders’ equity.

PARTIAL INCOME STATEMENT

For year ended December 31.

Particulars	$
Other Loss:Loss on Sale of Investments Other Income:Unrealized Gain on Trading Securities Dividend Income	120 880 700

To determine

(e)

Introduction:

Investment in debt security (available for sale securities and trading securities) as well as equity securities is recorded using Fair Value Method.

To show:

Securities on December 31 Balance Sheet.

Answer to Problem 27E

PARTIAL BALANCE SHEET

As at December 31

ASSETS	Sub-total ($)	Total ($)
Current Assets:Trading Securities at cost (+) Allowance to Adjust Trading Securities to Market Trading Securities at market	31,140 880	32,020

Explanation of Solution

Securities	Acquisition Cost (1)	Fair Value at Dec 31, 2020 (2)	Difference [(2) − (1)]
B	$10,240	$9,600	(640)
N	$20,900	$22,420	$1,520
Total	$31,140	$32,020	880

1. The change in total value of trading securities and available for sale securities is calculated.
2. If the Fair Value is more than Acquisition Cost then the increase in value is shown as ‘Unrealized Gain on Trading Securities’ or ‘Unrealized Gain on Available for Sale Securities’.
3. If the Fair Value is less than Acquisition Cost then the decrease in value is shown as ‘Unrealized Loss on Trading Securities’ or ‘Unrealized Loss on available for sale securities’.
4. ‘Unrealized Gain’ on both is added in book value of investment on the balance sheet so that it results in the fair market value of the investment whereas ‘Unrealized Loss’ is deducted from the book value of investment.
5. ‘Unrealized Gain on Trading Securities’ or ‘Unrealized Loss on Trading Securities’ is shown on the Income Statement under the head ‘Other Income’ or ‘Other Loss’, respectively.
6. ‘Unrealized Gain on Available for Sale Securities’ or ‘Unrealized Loss on Available for Sale Securities’ is shown as part of ‘Accumulated Other Comprehensive Income’ in the stockholders’ equity as separate head. It doesn’t affect the Income Statement, instead affects the stockholders’ equity.