Chapter C, Problem 1PSA

To determine

Journal Entry:

Journal is the primary record of the business transaction in chronological (date wise) order. Journal Entry contains two effects one is debit and other is credit, under double entry book keeping system.

Adjusting Entries:

Adjusting entries are made at the end of the year to adjust the financial position of the enterprise according to accrual basis of accounting.

To prepare: Journal entries to record the transactions.

Explanation of Solution

For the year 2017,

To record purchase of 800shares of F company at $26 per share plus $125 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan20, 2017	Short term investment Trading securities		20,925
	Cash			20,925
	(Being short term investment purchase against cash)

Table(1)

• The short term investment of C Company is increase. The short term investment is the asset of the company and the current asset of C Company also increases.
• The cash account is decrease by $20,925, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 2,200 shares of L company at $44.25 per share plus $578 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Feb 09, 2017	Short term investment Trading securities		97,928
	Cash			97,928
	(Being short term investment purchase against cash)

Table(2)

• The short term investment of C Company is increase. The short term investment is the asset of the company and the current asset of C Company also increases.
• The cash account is decrease by $97,928, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 750 shares of Z company at $7.50 per share plus $200 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Oct 12, 2017	Short term investment Trading securities		5,825
	Cash			5,825
	(Being short term investment purchase against cash)

Table(3)

• The short term investment of C Company is increase. The short term investment is the asset of the company and the current asset of C Company also increases.
• The cash account is decrease by $5,825, and the credit of cash means that the current asset of the company also decreases.

To record the unrealized loss occurs on December 31, 2017.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31, 2017	Unrealized loss- Income		5,322
	Fair value adjustment Short term investment			5,322
	(Being unrealized loss suffered of $275 at the time of closing)

Table(4)

• The fair value of short term investment is $130,000 and the cost of share is $ 124,678 so the C Company suffers an unrealized loss of $5,322, and unrealized loss reduces the balance of income.
• The fair value adjustment account is an adjustment account to account for the unrealized loss suffers by C Company.

For the year 2018,

To record sale of 800 share of F Company at $29 and commission is $285.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
April15	Cash		22,915
	Gain on sale of short terminvestment			1,990
	Short term investment			20,925
	(Being short term investment sold at a gain of $1,990 and receive cash )

Table(5)

• Cash receive at the time of sale of investment it increases the cash balance and the asset of the company also increases.
• By the sale of short term investment, the short term investment account decreases and the asset of the company also decreases with $20,925 amount.
• At the time of sale C Company receives the gain on sale of investment and this gain is credited to the gain on sale of short term investment account.

To record sale of 750 share of Z Company at $10.25 and commission is $102.50.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
July 5 2018	Cash		7,585
	……Gain on sale of short term investment			1,760
	Short term investment			5,825
	(Being short term investment sold at a gain of $1,990 and receive cash )

Table(6)

• Cash receive at the time of sale of investment it increases the cash balance and the asset of the company also increases.
• By the sale of short term investment, the short term investment account decreases and the asset of the company also decreases with $5,825 amount.
• At the time of sale C Company receives the gain on sale of investment and this gain is credited to the gain on sale of short term investment account.

To record purchase of 1,600 shares of HCorporation at $30 per share plus $444 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
July22, 2018	Short term investment Trading securities		48,444
	Cash			48,444
	(Being short term investment purchase against cash)

Table(7)

• The short term investment of C Company is increase. The short term investment is the asset of the company and the current asset of C Company also increases.
• The cash account is decrease by $48,444, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 1,800 shares of DCorporation at $18.25 per share plus $290 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
August 19, 2018	Short term investment Trading securities		33,140
	Cash			33,140
	(Being short term investment purchase against cash)

Table(8)

• The short term investment of C Company is increase. The short term investment is the asset of the company and the current asset of C Company also increases.
• The cash account is decrease by $33,140, and the credit of cash means that the current asset of the company also decreases.

To record the unrealized loss occurs on December 31, 2018.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31, 2018	Unrealized loss- Income		24,834
	Fair value adjustment Short term investment $\left(\$19,512+\$5,322\right)=\$24,834$			24,834
	(Being unrealized loss suffered of $24,834 at the time of closing)

Table(9)

• The fair value of short term investment is $160,000 and the cost of share is $ 179,512 so the C Company suffers an unrealized loss of $24,834, and unrealized loss reduces the balance of equity account.
• The fair value adjustment account is an adjustment account to account for the unrealized loss suffers by C Company.

For the year 2019,

To record purchase of 3,400 shares of HC at $34 per share plus $420 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Feb 27, 2019	Short term investment Trading securities		116,020
	Cash			116,020
	(Being short term investment purchase against cash)

Table(10)

• The short term investment of C Company is increase. The short term investment is the asset of the company and the current asset of C Company also increases.
• The cash account is decrease by $116,020, and the credit of cash means that the current asset of the company also decreases.

To record sale of 1,600 share of H Company at $25 and commission is $250.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
March3 2019	Cash		39,750
	Loss on sale of short term investment		8,694
	Short term investment			48,444
	(Being short term investment sold at a loss of $8,694 and receive cash )

Table(11)

• Cash receive at the time of sale of investment it increases the cash balance and the asset of the company also increases.
• By the sale of short term investment, the short term investment account decreases and the asset of the company also decreases with $48,444 amount.
• At the time of sale C Company sufferaloss on sale of investment and this loss is debited to the loss on sale of short term investment account.

To record sale of 2,200 share of L Company at $42 and commission is $420.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
June 21 2019	Cash		92,150
	Loss on sale of short term investment		5,778
	Short term investment			97,928
	(Being short term investment sold at a loss of $8,694 and receive cash )

Table(12)

• Cash receive at the time of sale of investment it increases the cash balance and the asset of the company also increases.
• By the sale of short term investment, the short term investment account decreases and the asset of the company also decreases with $97,928 amount.
• At the time of sale C Company suffer a loss on sale of investment and this loss is debited to the loss on sale of short term investment account.

To record purchase of 1,200 shares of B&D at $47.50 per share plus $595 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
June 30, 2019	Short term investment Trading securities		57,595
	Cash			57,595
	(Being short term investment purchase against cash)

Table(13)

• The short term investment of C Company is increase. The short term investment is the asset of the company and the current asset of C Company also increases.
• The cash account is decrease by $57,595, and the credit of cash means that the current asset of the company also decreases.

To record sale of 1,800 share of D Company at $18.25 and commission is $309.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Nov. 1	Cash		32,541
	Loss on sale of short term investment		599
	Short term investment			33,140
	(Being short term investment sold at a loss of $599 and receive cash )

Table(14)

• Cash receive at the time of sale of investment it increases the cash balance and the asset of the company also increases.
• By the sale of short term investment, the short term investment account decreases and the asset of the company also decreases with $33,140 amount.
• At the time of sale C Company suffer a loss on sale of investment and this loss is debited to the loss on sale of short term investment account.

To record the unrealized gain occurs on December 31, 2019.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31, 2019	Fair value adjustment Short term investment $\left(\$19,512+\$6,385\right)=\$25,897$		25,897
	Unrealized gain income			25,897
	(Being unrealized loss suffered of $24,834 at the time of closing)

Table(15)

• The fair value of short term investment is $180,000 and the cost of share is $ 173,615 so the C Company earns an unrealized gain of $25,897, and unrealized gain increase the balance of income.
• The fair value adjustment account is an adjustment account to account for the unrealized loss suffers by C Company.

Working Notes:

Calculation of the value of purchase price of shares, F Company

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(800\times \$26\right)+\$125\\ =\$20,800+\$125\\ =\$20,925\end{array}$

Calculation of the value of purchase price of shares,F Company

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(750\times \$7.50\right)+\$2,00\\ =\$5,625+\$2,00\\ =\$5,825\end{array}$

Calculation of the value of purchase price of shares,L Company

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(2,200\times \$44.25\right)+\$578\\ =\$97,350+\$578\\ =\$97,928\end{array}$

Calculation of fair value adjustment as on December 31, 2017,

$\begin{array}{c}\text{Fair value adjustment}=\text{Fair Value}-\mathrm{Cos}\text{t of share}\\ =\$130,000-\left(\$20,925+5,825+97,928\right)\\ =\$130,000-\$124,678\\ =\$5,322\end{array}$

Calculation of sale price of shares of F Company

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(800\times \$29\right)-\$285\\ =\$23,200-\$285\\ =\$22,915\end{array}$

Calculation of Gain in the sale of investment of F Company

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$22,915-\$20,925\\ =\$1,990\end{array}$

Calculation of sale price of shares of Z Company

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(750\times \$10.25\right)-\$102.50\\ =\$7,687.5-\$102.50\\ =\$7,585\end{array}$

Calculation of Gain in the sale of investment of Z Company

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$7,585-\$5,825\\ =\$1,760\end{array}$

Calculation of the value of purchase price of shares, H Company

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,600\times \$30\right)+\$444\\ =\$48,000+\$444\\ =\$48,444\end{array}$

Calculation of the value of purchase price of shares, D Company

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,800\times \$18.25\right)+\$290\\ =\$32,850+\$290\\ =\$33,140\end{array}$

Calculation of fair value adjustment as on December 31, 2018,

$\begin{array}{c}\text{Fair value adjustment}=\text{C}os\text{t of share}-\text{Fair Value}\\ =\left(\$124,678-20,925-5,825+48,444+33,140\right)-\$160,000\\ =\$179,512-\$160,000\\ =\$19,512\end{array}$

Calculation of the value of purchase price of shares, HC

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(3,400\times \$34\right)+\$420\\ =\$115,600+\$420\\ =\$116,020\end{array}$

Calculation of sale price of shares of H Company

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(1,600\times \$25\right)-\$250\\ =\$40,000-\$250\\ =\$39,750\end{array}$

Calculation of loss in the sale of investment of H Company

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale price}\\ =\$48,444-\$39750\\ =\$8,694\end{array}$

Calculation of sale price of shares of L Company

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(2,200\times \$42\right)-\$420\\ =\$92,400-\$250\\ =\$92,150\end{array}$

Calculation of loss in the sale of investment of L Company

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale price}\\ =\$97,928-\$92,150\\ =\$5,778\end{array}$

Calculation of the value of purchase price of shares, B & D Company

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,200\times \$47.50\right)+\$595\\ =\$57,000+\$595\\ =\$57,595\end{array}$

Calculation of sale price of shares of D Company

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(1,800\times \$18.25\right)-\$309\\ =\$32,850-\$309\\ =\$32,541\end{array}$

Calculation of loss in the sale of investment of D Company

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale price}\\ =\$32,541-\$33,140\\ =\$599\end{array}$

Calculation of fair value adjustment as on December 31, 2019,

$\begin{array}{c}\text{Fair value adjustment}=\text{Fair Value}-\text{C}os\text{t of share}\\ =\left[\begin{array}{l}\$180,000-\\ \left(\$179,515+116,020-48,444-97,928+57595-33140\right)\end{array}\right]\\ =\$180,000-173,615\\ =\$6,385\end{array}$