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

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

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(4,000\times \$24.25\right)+\$180\\ =\$97,000+\$180\\ =\$97,180\end{array}$

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

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(2,000\times \$49.25\right)+\$175\\ =\$98,500+\$175\\ =\$98,675\end{array}$

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

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(2,000\times \$49.25\right)+\$175\\ =\$98,500+\$175\\ =\$98,675\end{array}$

Calculation of interest on US Treasury bills,

$\begin{array}{c}\text{Interest}=\text{Amount}\times \text{Rate}\times \text{Time period}\\ =\$100,000\times \frac{6}{100}\times \frac{3}{12}\\ =1,500\end{array}$

Calculation of cash dividend of G Company,

$\begin{array}{c}\text{Cash dividend}=\text{Number of share}\times \text{Rate of dividend}\\ =4,000\times \$0.85\\ =\$3,400\end{array}$

Calculation of sale price of shares of F Company

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(2,000\times \$30\right)-\$225\\ =\$60,000-\$225\\ =\$59,775\end{array}$

Calculation of Gain in the sale of investment of F Company

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$59,775-\$48,590\\ =\$11,185\end{array}$

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

$\begin{array}{c}\text{Cash dividend}=\text{Number of share}\times \text{Rate of dividend}\\ =2,000\times \$1.90\\ =\$3,800\end{array}$

Calculation of cash dividend of G Company,

$\begin{array}{c}\text{Cash dividend}=\text{Number of share}\times \text{Rate of dividend}\\ =2,000\times \$1.05\\ =\$2,100\end{array}$

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

$\begin{array}{c}\text{Cash dividend}=\text{Number of share}\times \text{Rate of dividend}\\ =2,000\times \$1.30\\ =\$2,600\end{array}$

2.

To determine

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

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 $\left(\text{A}-\text{B}\right)$
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,

$\begin{array}{c}\text{Cost}=\left(\text{Number of share}\times \text{Rate}\right)+\text{Brokerage Fee}\\ =\left(2,000\times \$24.25\right)+\$90\\ =\$48,500+\$90\\ =\$48,590\end{array}$

Calculation of fair value,

$\begin{array}{c}\text{Fair value }=\text{Number of share}\times \text{Rate}\\ =2,000\times 26.50\\ =53,000\end{array}$

For P Company,

Calculate Cost of share of G Company,

$\begin{array}{c}\text{Cost}=\left(\text{Number of share}\times \text{Rate}\right)+\text{Brokerage Fee}\\ =\left(2,000\times \$49.25\right)+\$175\\ =\$98,500+\$175\\ =\$98,675\end{array}$

Calculation of fair value,

$\begin{array}{c}\text{Fair value }=\text{Number of share}\times \text{Rate}\\ =2,000\times 46.50\\ =93,000\end{array}$

For X Company,

Calculate Cost of share of G Company,

$\begin{array}{c}\text{Cost}=\left(\text{Number of share}\times \text{Rate}\right)+\text{Brokerage Fee}\\ =\left(1,000\times \$16.75\right)+\$205\\ =\$16,750+\$205\\ =\$16,955\end{array}$

Calculation of fair value,

$\begin{array}{c}\text{Fair value }=\text{Number of share}\times \text{Rate}\\ =1,000\times 13.75\\ =13,750\end{array}$

3.

To determine

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

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.

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.

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,

$\text{Net Income}=\text{Dividend}+\text{Interest}+\text{gain on sale of investment}$

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

$\begin{array}{c}\text{Net income}=\$11,900+\$1,500+\$11,185\\ =\$24,585\end{array}$

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.

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,

$\begin{array}{c}\text{Total dividend}=\$3,400+\$3,800+\$2,100+\$2,600\\ =\$11,900\end{array}$

Net effect on equity is

$\begin{array}{c}\text{Equity}=\text{Net income}-\text{Unrealized loss}\\ =\$24,585-\$4,470\\ =\$20,115\end{array}$