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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Investments in Trading Securities

Maxwell Company engaged in the following transactions involving short-term investments:

a. Purchased 200 shares of Bartco stock for $12,800.

b. Received a $1.60-per-share dividend on the Bartco stock.

c. Sold 40 shares of the Bartco stock for $61 per share.

d. Purchased 380 shares of Newton stock for $20,900.

e. Received a dividend of $1.00 per share on the Newton stock.

At December 31, the Bartco stock has a market value of $60 per share, and the Newton stock has a market value of $59 per share.

Required:

1. Prepare entries for Maxwell’s journal to record these transactions assuming they are trading securities,

2. Calculate the market value of Maxwell’s short-term investment portfolio at December 31.

3. Prepare the necessary adjusting entry at December 31.

4. CONCEPTUAL CONNECTION What is the income statement effect of the adjusting entry?

5. How would these investments be reported on the December 31 balance sheet?

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.

Explanation

a. No. of shares = 200

Acquisition Cost = $12,800

Acquisition Cost per share = $12,800200 = $64

b. No. of shares = 200

Dividend per share = $1.60

Total Dividend received = 200×$1.60 = $320

c. No. of shares sold = 40

Selling Price per share = $61

Selling Price for 40 shares = 40×$61 = $2,440

Acquisition Cost per share = $64

Acquisition Cost

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.

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.

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.

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.

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