Chapter C, Problem 3BP

1.

To determine

Prepare journal entries to record the given transaction.

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:

Journal
Date	Account Title and Explanation	Post	Debit	Credit
		Ref.	($)	($)
March 10, 2015	Long-Term Investments-AFS (Company A) (1)		31,400
	Cash			31,400
	(To record the  Purchase of 1,200 shares for $25.50 per share along with a commission of $800)
April 7,  2015	Long-Term Investments—AFS (Company F) (2)		57,283
	Cash			57,283
	(To record the  Purchase of  2,500 shares for $22.50 per share along with a commission of $1,033)
September 1, 2015	Long-Term Investments—AFS (Company P) (3)		29,090
	Cash			29,090
	(To record the  Purchase of  600 shares for $47 per share along with a commission of $890)
December 31, 2015	Unrealized Loss—Equity		2,873
	Fair Value Adjustment—AFS (Company LT) (7)			2,873
	(To record the Annual adjustment to fair value of securities)
April 26, 2016	Cash (8)		50,043
	Loss on Sale of Investments		7,240
	Long-Term Investments—AFS (Company F)			57,283
	(To record the  sale of 2,500 shares at $20.50 per share)
June 2, 2016	Long-Term Investments—AFS (Company D) (9)		35,700
	Cash			35,700
	(To record the  Purchase of  1800 shares for $19.25 per share along with a commission of $1050)
June 14, 2016	Long-Term Investments—AFS (Company S) (10)		25,480
	Cash			25,480
	(To record the  Purchase of  1,200 shares for $21 per share along with a commission of $280)
November 27, 2016	Cash (11)		29,755
	Gain on Sale of Investments			665
	Long-Term Investments—AFS (Company P)			29,090
	(To record the  sale of 600 shares for $51 per share)
December 31, 2016	Fair Value Adjustment-AFS (Company LT)		5,093
	Unrealized Loss-Equity (15)			2,873
	Unrealized Gain-Equity (15)			2,220
	(To record the Annual adjustment to fair value of securities)
January 28, 2017	Long-Term Investments—AFS (Company C&C) (16)		41,480
	Cash			41,480
	(To record the  Purchase of 1,000 shares for $40 per share along with a commission of $1480)
August 22, 2017	Cash  (17)		23,950
	Loss on Sale of Investments		7,450
	Long-Term Investments—AFS (Company A)			31,400
	(To record the  sale of 1,200 shares at $21.5 per share)
September 3, 2017	Long-Term Investments—AFS (Company M) (18)		84,780
	Cash			84,780
	(To record the  Purchase of 3,000 shares for $28 per share along with a commission of $780)
October 9, 2017	Cash  (19)		28,201
	Gain on Sale of Investments			2,721
	Long-Term Investments—AFS (Company S)			25,480
	(To record the  sale of 1,200 shares at $24 per share)
October 31, 2017	Cash  (20)		26,102
	Loss on Sale of Investments		9,598
	Long-Term Investments—AFS (Company E.K)			35,700
	(To record the  sale of 1,800 shares at $15 per share)
December 31, 2017	Unrealized Gain—Equity		2,220
	Unrealized Loss—Equity		6,260
	Fair Value Adjustment—AFS (Company LT) (23)			8,480
	(To record the Annual adjustment to fair value of securities)

Table (1)

Working note:

Calculate the purchased value of long-term investment (Company A)

$\begin{array}{c}\text{Long-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(1,200\times \$25.50\text{per}\text{share}\right)+\$800\\ =\$31,400\end{array}$ (1)

Calculate the purchased value of long-term investment (Company F)

$\begin{array}{c}\text{Long-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(2,500\times \$22.50\text{per}\text{share}\right)+\$1,033\\ =\$57,283\end{array}$ (2)

Calculate the purchased value of long-term investment (Company P)

$\begin{array}{c}\text{Long-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(600\times \$47\text{per}\text{share}\right)+\$890\\ =\$29,090\end{array}$ (3)

Calculate the fair value adjustment for 2015.

Name of the company	Cost of long-term investment	Fair value of long-term investment	Unrealized gain or (loss)
Company A	$31,400 (1)	$33,000 (4)
Company F	$57,283 (2)	$52,500 (5)
Company P	$29,090 (3)	$29,400 (6)
Total	$117,773	$114,900	$2,873 (7)

Table (2)

Calculate the fair value of long-term investment of Company A:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(1,200\times \$27.50\text{per}\text{share}\right)\\ =\$33,000\end{array}$ (4)

Calculate the fair value of long-term investment of Company F:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(2,500\times \$21\text{per}\text{share}\right)\\ =\$52,500\end{array}$ (5)

Calculate the fair value of long-term investment of Company P:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(600\times \$49\text{per}\text{share}\right)\\ =\$29,400\end{array}$ (6)

Calculate the value of unrealized gain or loss

$\begin{array}{c}\text{Long-term investment = }\left(\text{Total Fair value }-\text{ Total cost of investment}\right)\\ =\left(\$117,773-\$114,900\right)\\ =\$2,873\end{array}$ (7)

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

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(2,500\times \$20.5\right)-\$1,207\\ =\$50,043\end{array}$ (8)

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

$\begin{array}{c}\text{Long-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(1,800\times \$19.25\text{per}\text{share}\right)+\$1,050\\ =\$35,700\end{array}$ (9)

Calculate the purchased value of long-term investment (Company S)

$\begin{array}{c}\text{Long-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(1,200\times \$21\text{per}\text{share}\right)+\$280\\ =\$25,480\end{array}$ (10)

Calculate the purchased value of long-term investment (Company P)

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(600\times \$51\text{per}\text{share}\right)-\$845\\ =\$29,755\end{array}$ (11)

Calculate the fair value adjustment for 2016.

Name of the company	Cost of long-term investment	Fair value of long-term investment	Unrealized gain or (loss)
Company A	$31,400 (11)	$34,800 (12)
Company D	$35,700 (10)	$32,400 (13)
Company S	$25,480 (3)	$27,600 (14)
Total	$92,580	$94,800	$2,220

Table (3)

Calculate the fair value of long-term investment of Company A:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(1,200\times \$29\text{per}\text{share}\right)\\ =\$34,800\end{array}$ (12)

Calculate the fair value of long-term investment of Company D:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(1,800\times \$18\text{per}\text{share}\right)\\ =\$32,400\end{array}$ (13)

Calculate the fair value of long-term investment of Company S:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(1,200\times \$23\text{per}\text{share}\right)\\ =\$27,600\end{array}$ (14)

Calculate the value of unrealized gain or loss

$\begin{array}{c}\text{Long-term investment = }\left(\begin{array}{l}\text{Total Fair value}-\text{Total}\\ \text{cost of investment}\end{array}\right)-\text{Unadjusted balance of 2015}\\ =\left(\$92,580-\$94,800\right)-\$2,873\\ =\$5,093\end{array}$ (15)

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

$\begin{array}{c}\text{Long-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(1,000\times \$40\text{per}\text{share}\right)+\$1,480\\ =\$41,480\end{array}$ (16)

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

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(1,200\times \$21.50\right)-\$1,850\\ =\$23,950\end{array}$ (17)

Calculate the purchased value of long-term investment (Company M)

$\begin{array}{c}\text{Long-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(3,000\times \$28\text{per}\text{share}\right)+\$780\\ =\$84,780\end{array}$ (18)

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

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(1,200\times \$24\right)-\$599\\ =\$28,201\end{array}$ (19)

Calculate the value of cash received from the sale of stock investment (Company E.K stocks)

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(1,800\times \$15\right)-\$898\\ =\$26,102\end{array}$ (20)

Calculate the fair value adjustment for 2017.

Name of the company	Cost of long-term investment	Fair value of long-term investment	Unrealized gain or (loss)
Company C&C	$41,480 (16)	$48,000 (21)
Company M	$84,780 (18)	$72,000 (22)
Total	$126,260	$120,000	$6,260

Table (4)

Calculate the fair value of long-term investment of Company C&C:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(1,000\times \$48\text{per}\text{share}\right)\\ =\$48,000\end{array}$ (21)

Calculate the fair value of long-term investment of Company M:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(3,000\times \$24\text{per}\text{share}\right)\\ =\$72,000\end{array}$ (22)

Calculate the value of unrealized gain or loss:

$\begin{array}{c}\text{Long-term investment = }\left(\begin{array}{l}\text{Total Fair value}-\text{Total}\\ \text{cost of investment}\end{array}\right)+\text{Unadjusted balance of 2016}\\ =\left(\$126,260-\$120,000\right)+\$2,220\\ =\$8,480\end{array}$ (23)

2.

To determine

Prepare a table that summarizes the following

1. a. Total cost,
2. b. Total fair value adjustments,
3. c. Total fair value of the portfolio of long-term available-for-sale securities at year-end.

Explanation of Solution

Prepare a table that summarizes the total cost, total fair value adjustments, and the total fair value as follows:

Particulars	December 31, 2015	December 31, 2016	December 31, 2017
a. Long-Term AFS Securities (cost)	$117,773	$92,580	$126,260
b. Fair Value Adjustment	(2,873)	2,220	(6,260)
c. Long-Term AFS Securities (fair value)	$114,900	$94,800	$120,000

Table (5)

3.

To determine

Prepare a table that summarizes the following

1. a. The realized gains and losses,
2. b. The unrealized gains and losses for the portfolio of long-term available-for-sale securities at year-end.

Explanation of Solution

1. a. Prepare a table that summarizes the realized gains and losses as follows:

Particulars	2015	2016	2017
Realized gains (losses)
Sale of F shares		$(7,240)
Sale of P shares		665
Sale of D shares			$  (9,598)
Sale of A shares			(7,450)
Sale of S shares			2,721
Total realized gain (loss)	$0	$(6,575)	$(14,327)

Table (6)

1. b. Prepare a table that summarizes the Unrealized gains and losses as follows

Particulars	2015	2016	2017
Unrealized gains (losses) at year-end	$(2,873)	$2,220	$(6,260)

 Table (7)