Financial Accounting Fundamentals
Financial Accounting Fundamentals
6th Edition
ISBN: 9781259726910
Author: John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter C, Problem 1AP
To determine

Prepare journal entries to record the given transaction and prepare the adjusting entry to record the necessary fair value adjustments for the portfolio of trading securities.

Expert Solution & Answer
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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.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and equities.
  • Credit, all increase in liabilities, revenues, and equities, all decrease in assets, and expenses.

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

DateAccount Titles and DescriptionPost Ref. Debit ($) Credit ($)
January 20, 2017Short-Term Investments -Company F(1)20,925
Cash20,925
(To record the  Purchase of  800 shares for $26 per share along with a commission of $125)
February  9, 2017Short-Term Investments-Company L (2)97,928
      Cash97,928
(To record the  Purchase of  2,200 shares for $44.25 per share along with a commission of $578)
October 12, 2017Short-Term Investments-Company Z (3)5,825
      Cash5,825
((To record the  Purchase of  750 shares for $7.50 per share along with a commission of $200)
December 31, 2017Fair value adjustment-company ST(4)5,322
      Unrealized gain5,322
 (To record the  fair value of securities)
April 15, 2018Cash22,915
      Gain on Sale of Short-Term Investments1,990
       Short-Term Investments-Company  F(5)20,925
(To record the  sale of  800 shares at $29 per share)
July 5, 2018Cash7,585
      Gain on Sale of Short-Term Investments1,760
       Short-Term Investments-Company  Z(6)5,825
(To record the  sale of 7500 shares at $10.25 per share)
July 22, 2018Short-Term Investments-Company H (7)48,444
      Cash48,444
(To record the  Purchase of 1,600 shares for $30 per share along with a commission of $444)
August 19, 2018Short-Term Investment-Company D (8)33,140
      Cash33,140
(To record the  Purchase of 1,800 shares for $18.25 per share along with a commission of $290)
December 31, 2018Unrealized Loss24,834
      Fair value adjustment-company ST ($19,512+$5,322) (9)24,834
 (To record the  fair value of securities)
February 27, 2019Short-Term Investments -Company HC (10)116,020
Cash116,020
(To record the  Purchase of 3,400 shares for $34 per share along with a commission of $420)
March 3, 2019Cash (11)39,750
Loss on Sale of Short-Term Investments8,694
       Short-Term Investments-Company  H48,444
(To record the  sale of 1,600 shares at $25 per share)
June 21, 2019Cash (12)91,980
Loss on Sale of Short-Term Investments5,948
       Short-Term Investments-Company  L97,928
(To record the  sale of 2,200 shares at $42 per share)
June 30, 2019Short-Term Investments -Company B&D (13)57,595
Cash57,595
(To record the  Purchase of 1,200 shares for $47.50 per share along with a commission of $595)
November 1, 2019Cash32,541
Loss on Sale of Short-Term Investments599
       Short-Term Investments-Company  D (14)33,140
(To record the  sale of 1,800 shares at $18.25 per share)
December 31, 2017Fair value adjustment-company ST (15)25,897
      Unrealized gain25,897
 (To record the  fair value of securities)

Table (1)

Working note:

Calculate the purchased value of short-term investment (Company C)

Short-term investment = [(Number of shares×Price per share)+Brokerage fee]=(800×$26pershare)+$125=$20,800+$125=$20,925 (1)

Calculate the purchased value of short-term investment (Company L)

Short-term investment = [(Number of shares×Price per share)+Brokerage fee]=(2,200×$44.25pershare)+$578=$97,350+$578=$97,928 (2)

Calculate the purchased value of short-term investment (Company Z)

Short-term investment = [(Number of shares×Price per share)+Brokerage fee]=(750×$7.50pershare)+$200=$5,625+$200=$5,825 (3)

Calculate the fair value adjustment for 2017.

Unrealized Gain or(loss)} = Fair valueToatl Purchase cost= $130,000$20,925+$97,928+$5,825=$5,322 (4)

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

Cash received = ((Number of shares sold×Sales price per share)Brokerage fees)=(800×$29)$285=$23,200$285=$22,915 (5)

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

Cash received = ((Number of shares sold×Sales price per share)Brokerage fees)=(750×$10.25)$102.5=$7,687.5$102.5=$7,585 (6)

Calculate the purchased value of short-term investment (Company H)

Short-term investment = [(Number of shares×Price per share)+Brokerage fee]=(1,600×$30pershare)+$444=$48,000+$444=$48,444 (7)

Calculate the purchased value of short-term investment (Company D)

Short-term investment = [(Number of shares×Price per share)+Brokerage fee]=(1,800×$18.25pershare)+$290=$32,850+$290=$33,140 (8)

Calculate the fair value adjustment for 2018.

Fair value adjustmentfor 2018} = (Fair value[Total Purchase cost of 2017Sale+TotalPurchase cost of 2018])= $160,000[$124,678$20,925$5,825+48,444+$33,140]=$160,000$179,512=$19,512 (9)

Calculate the purchased value of short-term investment (Company HC)

Short-term investment = [(Number of shares×Price per share)+Brokerage fee]=(3,400×$34pershare)+$420=$115,600+$420=$116,020 (10)

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

Cash received = ((Number of shares sold×Sales price per share)Brokerage fees)=(1,600×$25)$250=$40,000$250=$39,750 (11)

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

Cash received = ((Number of shares sold×Sales price per share)Brokerage fees)=(2,200×$42)$420=$92,400$420=$91,980 (12)

Calculate the purchased value of short-term investment (Company B&D)

Short-term investment = [(Number of shares×Price per share)+Brokerage fee]=(1,200×$47.50pershare)+$595=$57,000+$595=$57,595 (13)

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

Cash received = ((Number of shares sold×Sales price per share)Brokerage fees)=(1,800×$18.25)$309=$32,850$309=$32,541 (14)

Calculate the fair value adjustment for 2019.

Fair value adjustmentfor 2019} = (Fair value[Total Purchase and sale valueof 2017+PurchaseSale]+Fair value of 2018)= $180,000[$179,512+$116,020$48,444$97,928+$57,595$33,140]+$19,512=$180,000$173,615+19,512=$25,897 (15)

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