Financial and Managerial Accounting
Financial and Managerial Accounting
7th Edition
ISBN: 9781259726705
Author: John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter C, Problem 2PSA
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.

1.

To prepare: Journal entries to record the transactions of year 2017

Expert Solution
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Explanation of Solution

To record purchase of 4,000shares of G company at $24.25 per share plus $180 as commission

Date Account Title and Explanation Post ref Debit ($) Credit ($)
April 16 Short term investment 97,180
Cash 97,180
(Being short term investment purchase against cash)

Table(1)

  • The short term investment of R Company is increase. The short term investment is the asset of the company and the current asset of R Company also increases.
  • The cash account is decrease by $97,180 and the credit of cash means that the current asset of the company also decreases.

To record purchase of 3 months US Treasury bill of $100,000, 6% interest mature on July 31,

Date Account Title and Explanation Post ref Debit ($) Credit ($)
May 1 Short term investment 100,000
Cash 100,000
(Being short term investment purchase against cash)

Table(2)

  • The short term investment of R Company is increase. The short term investment is the asset of the company and the current asset of R Company also increases.
  • The cash account is decrease by $100,000 and the credit of cash means that the current asset of the company also decreases.

To record purchase of 2,000shares of P company at $49.25 per share plus $180 as commission

Date Account Title and Explanation Post ref Debit ($) Credit ($)
July7 Short term investment 98,675
Cash 98,675
(Being short term investment purchase against cash)

Table(3)

  • The short term investment of R Company is increase. The short term investment is the asset of the company and the current asset of R Company also increases.
  • The cash account is decrease by $98,675 and the credit of cash means that the current asset of the company also decreases.

To record purchase of 1,000shares of X stock at $16.75 per share plus $205 as commission

Date Account Title and Explanation Post ref Debit ($) Credit ($)
July 20 Short term investment 98,675
Cash 98,675
(Being short term investment purchase against cash)

Table(4)

  • The short term investment of R Company is increase. The short term investment is the asset of the company and the current asset of R Company also increases.
  • The cash account is decrease by $98,675 and the credit of cash means that the current asset of the company also decreases.

Received interest on US Treasury bills, and the bill matured as on July 31,

Date Account Title and Explanation Post ref Debit ($) Credit ($)
August 1 Cash 101,500
Short term investment 100,000
Interest revenue 1,500
(Being short term investment matureand interest received)

Table(5)

  • Short term investment credit as the investment mature and the balance of short term investment decreases.
  • Cash account debit, as cash is receive when investment mature and interest earn
  • The interest revenue account credit, as income receives in the form of interest to R Company.

Receive $0.85 per share cash dividend on G Company stock,

Date Account Title and Explanation Post ref Debit ($) Credit ($)
August 15 Cash 3,400
Dividend Revenue 3,400
(Being cash dividend received)

Table(6)

  • Cash account debit as cash is received from G Company as cash dividend,
  • Dividend revenue account credit as it increase the income of R Company. The dividend revenue account has credit balance.

To record sale of 2,000 share of G Company at $30 and commission is $225.

Date Account Title and Explanation Post ref Debit ($) Credit ($)
August28 Cash 59,775
……Gain on sale of short term investment 11,185
Short term investment 48,590
(Being short term investment sold at a gain of $1,990 and receive cash )

Table(7)

  • 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 $48,590 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.

Receive $1.90 per share cash dividend on P Company stock,

Date Account Title and Explanation Post ref Debit ($) Credit ($)
October1 Cash 3,800
Dividend Revenue 3,800
(Being cash dividend received)

Table(8)

  • Cash account debit as cash is received from P Company as cash dividend,
  • Dividend revenue account credit as it increase the income of R Company. The dividend revenue account has credit balance.

Receive $1.05 per share cash dividend on G Company stock,

Date Account Title and Explanation Post ref Debit ($) Credit ($)
December 15 Cash 2,100
Dividend Revenue 2,100
(Being cash dividend received)

Table(9)

  • Cash account debit as cash is received from G Company as cash dividend,
  • Dividend revenue account credit as it increase the income of R Company. The dividend revenue account has credit balance.

Receive $1.30 per share cash dividend on P Company stock,

Date Account Title and Explanation Post ref Debit ($) Credit ($)
December 31 Cash 2,600
Dividend Revenue 2,600
(Being cash dividend received)

Table(10)

  • Cash account debit as cash is received from G Company as cash dividend,
  • Dividend revenue account credit as it increase the income of R Company. The dividend revenue account has credit balance.

Working Notes:

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

    Purchase price of shares=( Number of shares×share price )+Commision =( 4,000×$24.25 )+$180 =$97,000+$180 =$97,180

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

    Purchase price of shares=( Number of shares×share price )+Commision =( 2,000×$49.25 )+$175 =$98,500+$175 =$98,675

Calculation of the value of purchase price of shares, X stock

    Purchase price of shares=( Number of shares×share price )+Commision =( 2,000×$49.25 )+$175 =$98,500+$175 =$98,675

Calculation of interest on US Treasury bills,

    Interest=Amount×Rate×Time period =$100,000× 6 100 × 3 12 =1,500

Calculation of cash dividend of G Company,

    Cash dividend=Number of share×Rate of dividend =4,000×$0.85 =$3,400

Calculation of sale price of shares of F Company

    Sale price of shares=( Number of shares×share price )Broker fee =( 2,000×$30 )$225 =$60,000$225 =$59,775

Calculation of Gain in the sale of investment of F Company

    Gain=Sale PriceCost of short term investment =$59,775$48,590 =$11,185

Calculation of cash dividend of P Company as on October 1,

    Cash dividend=Number of share×Rate of dividend =2,000×$1.90 =$3,800

Calculation of cash dividend of G Company,

    Cash dividend=Number of share×Rate of dividend =2,000×$1.05 =$2,100

Calculation of cash dividend of P Company as on December 31,

    Cash dividend=Number of share×Rate of dividend =2,000×$1.30 =$2,600

2.

To determine

To prepare: A table that show year end fair value of R investment

2.

Expert Solution
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Explanation of Solution

Given,
The fair value of G Company is $26.50.
The fair value of P Company is $46.50.
The fair value of X Company is $13.75.

Particulars Cost ($) (A) Fair Value ($) (B) Unrealized Loss ( AB )
G Company 48,590 53,000
P Company 98,675 93,000
X Company 16,955 13,750
164,220 159,750 4,470

Table(11)

Thus, the unrealized loss is $4,470.

Working Notes:

For G Company,

Calculate Cost of share of G Company,

    Cost=( Number of share×Rate )+Brokerage Fee =( 2,000×$24.25 )+$90 =$48,500+$90 =$48,590

Calculation of fair value,

    Fair value =Number of share×Rate =2,000×26.50 =53,000

For P Company,

Calculate Cost of share of G Company,

    Cost=( Number of share×Rate )+Brokerage Fee =( 2,000×$49.25 )+$175 =$98,500+$175 =$98,675

Calculation of fair value,

    Fair value =Number of share×Rate =2,000×46.50 =93,000

For X Company,

Calculate Cost of share of G Company,

    Cost=( Number of share×Rate )+Brokerage Fee =( 1,000×$16.75 )+$205 =$16,750+$205 =$16,955

Calculation of fair value,

    Fair value =Number of share×Rate =1,000×13.75 =13,750

3.

To determine

To prepare: Journal entries to record the year end adjustment.

3.

Expert Solution
Check Mark

Explanation of Solution

Record unrealized loss

Date Account Title and Explanation Post ref Debit ($) Credit ($)
December 31, Unrealized loss- (Equity) 4,470
Fair value adjustment Short term investment 4,470
(Being unrealized loss recorded of $4,470)

Table(12)

  • The fair value per share is less than the cost of share as calculated in part 2 so unrealized loss debits. The balance of equity is decrease by $4,470.
  • The fair value adjustment account is an adjustment account to account for the unrealized loss suffers by R Company.

4.

To determine

To explain: The presentation of balance sheet including fair value adjustment.

4.

Expert Solution
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Explanation of Solution

The balance sheet prepare as per the cost value of the short term investment.

In balance sheet the R Company reported short term investment of $164,220 and show a deduction of $4,470 for fair value adjustment. The resultant is fair value of the short term investment.

Thus, the short term investment shows at cost price and adjustment is made into it.

5.

(a)

To determine

To identify: the effect of short term investment on income statement.

5.

(a)

Expert Solution
Check Mark

Explanation of Solution

Calculated values,
Dividend is $11,900
Interest is $1,500
Gain on sale of short term investment is $11,185

Formula to calculate Net income is,

    Net Income=Dividend+Interest+gain on sale of investment

Substitute, $11,900 for dividend, $1,500 for interest and $11,185 for gain on sale of investment in the above equation,

    Net income=$11,900+$1,500+$11,185 =$24,585

Thus, the net income is increase by $24,585

(b)

To determine

To identify: the effect of short term investment on equity section of balance sheet at year end 2017.

(b)

Expert Solution
Check Mark

Explanation of Solution

The following are the effects of shgort term investment on equity,

  • Increase in the income of $24,585 increase the equity
  • Deduct $4,470 as unrealized loss from the equity

Thus, the effect on equity is $20,115

Working Notes:

Calculate total dividend earned,

    Total dividend=$3,400+$3,800+$2,100+$2,600 =$11,900

Net effect on equity is

    Equity=Net incomeUnrealized loss =$24,585$4,470 =$20,115

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