Chapter C, Problem 3PSA

1.

To determine

To prepare:

The journal entries to record the transactions and any year-end fair value adjustments to the portfolio of long-term available-for-sale securities.

Answer to Problem 3PSA

Solution:

Prepare the journal entries for the year 2015 as shown below.

Journal entries of G Company For the year 2015
Date	Particulars	L/F	Debit ($)	Credit ($)
Jan 20	Long-term investment - Trading securities		20,740
	Cash			20,740
	(Being long-term investment purchase against cash)
Feb 9	Long-term investment - Trading securities		55,665
	Cash			55,665
	(Being long-term investment purchase against cash)
June 12	Long-term investment - Trading securities		40,695
	Cash			40,695
	(Being long-term investment purchase against cash)
Dec 31	Fair value adjustment – Long-term investment		11,228
	Unrealized gain			11,228
	(Being unrealized gain earned of $11,228 at the time of closing)

Table – 1

Explanation of Solution

► The long-term investment of G Company increases. The long-term investment is an asset of the company, so the current asset of the company also increases.

► The cash account decreases by $20,925. So, cash account is credited which means that the current asset of the company also decreases.

► The cash account decreases by $55,665. So, cash account is credited which means that the current asset of the company also decreases.

► The cash account decreases by $40,695. So, cash account is credited which means that the current asset of the company also decreases.

► The fair value adjustment account is an adjustment account recorded as an unrealized gain earned by the company.

► The fair value of the long-term investment is less than the cost of share. So, the company earns an unrealized gain of $11,228, which increases the balance of income.

Now, prepare the journal entries for the year 2016 as shown below.

Journal entries of G Company For the year 2016
Date	Particulars	L/F	Debit ($)	Credit ($)
April 15	Cash		23,248
	Gain on sale of long-term investment			2,508
	Long-term investment			20,740
	(Being long-term investment sold at a gain of $1,990 and receive cash )
July 5	Cash		35,615
	Loss on sale of long-term investment		5,080
	Long-term investment			40,695
	(Being long-term investment sold at a loss of $599 and receive cash )
June 22	Long-term investment - Trading securities		13,980
	Cash			13,980
	(Being long-term investment purchase against cash)
Aug 19	Long-term investment - Trading securities		15,498
	Cash			15,498
	(Being long-term investment purchase against cash)
Dec 31	Fair value adjustment - Long-term investment		21,396
	Unrealized gain			21,396
	(Being unrealized gain earned of at the time of closing)

Table - 2

► Cash received at the time of sale of investment increases the cash balance and the value of assets of the company.

► On the sale of short-term investment, the short-term investment account decreases and the asset of the company also decreases by $20,740.

► On the time of sale, C Company earns a gain on the sale of investment. This gain is credited to the gain on sale of long-term investment account.

► On the sale of short-term investment, the long-term investment account decreases and the asset of the company also decreases by $40,695.

► On the time of sale, C Company earns a loss on the sale of investment. This loss is debited to the loss on sale of long-term investment account.

► The long-term investment of G Company increases. The long-term investment is an asset to the company, so the current asset of the company also increases.

► The cash account decreases by $13,980. The credit of the cash account means that the current asset of the company also decreases.

► The cash account decreases by $15,498. The credit of the cash account means that the current asset of the company also decreases.

► The fair value adjustment account is an adjustment account reported as an unrealized gain earned by the company.

► The fair value of long term investment is less than the cost of share. So, the company earns an unrealized gain of $21,396, which increases the balance of income.

Now, prepare the journal entries for the year 2017 as shown below.

Journal entries of G Company For the year 2017
Date	Particulars	L/F	Debit ($)	Credit ($)
Feb 27	Long-term investment - Trading securities		161,325
	Cash			161,325
	(Being long-term investment purchase against cash)
June 21	Cash		56,720
	Gain on sale of long-term investment			1,055
	Long-term investment			55,665
	(Being long-term investment sold at a gain of $1,055 and receive cash )
June 30	Long-term investment - Trading securities		50,835
	Cash			50,835
	(Being long-term investment purchase against cash)
Aug 3	Cash		9,315
	Loss on sale of long-term investment		4,665
	Long-term investment			13,980
	(Being long-term investment sold at a loss of $4,665 and receive cash )
June 21	Cash		19,850
	Gain on sale of long-term investment			4,352
	Long-term investment			15,498
	(Being long-term investment sold at a gain of $4,352 and receive cash )
Dec 31	Unrealized loss - Income		462
	Fair value adjustment – Short-term investment			462
	(Being unrealized loss suffered of $462 at the time of closing)

Table - 3

► The long-term investment of G Company increases. The long-term investment is an asset to the company, so the current asset of the company also increases.

► The cash account decreases by $161,325. The credit of the cash account means that the current asset of the company also decreases.

► Cash received at the time of sale of investment increases the cash balance and the value of assets of the company.

► On the sale of short-term investment, the short-term investment account decreases and the asset of the company also decreases by $55,665.

► On the time of sale, C Company earns a gain on the sale of investment. This gain is credited to the gain on sale of long-term investment account.

► The cash account decreases by $50,835. The credit of the cash account means that the current asset of the company also decreases.

► On the sale of short-term investment, the short-term investment account decreases and the asset of the company also decreases by $13,980.

► On the time of sale, C Company suffers a loss on the sale of investment. This loss is debited to the loss on sale of long-term investment account.

► On the sale of short-term investment, the long-term investment account decreases and the asset of the company also decreases by $55,665.

► The fair value of short-term investment is $220,200 and the cost of share is $219,738. So, the company suffers an unrealized loss of $462, which reduces the balance of equity account.

► The fair value adjustment account is an adjustment account recorded as an unrealized loss suffered by the company.

Working notes:

1. Calculation of the value of purchase price of shares of J Company.

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,000\times \$20.50\right)+\$240\\ =\$20,500+\$240\\ =\$20,740\end{array}$

2. Calculation of the value of purchase price of shares of S Company.

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,200\times \$46.20\right)+\$225\\ =\$55,440+\$225\\ =\$55,665\end{array}$

3. Calculation of the value of purchase price of shares of M Company.

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,500\times \$27\right)+\$195\\ =\$40,500+\$195\\ =\$406,95\end{array}$

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

$\begin{array}{c}\text{Fair value adjustment}=\mathrm{Cos}\text{t of share}-\left(\text{Fair Value}\times \text{Share}\right)\\ =\left[\begin{array}{l}\left(\$20,925+5,825+97,928\right)-\\ \left(1,000\times 21.50+1,200\times 38+1,500\times 30.90\right)\end{array}\right]\\ =\$124,678-\left(\$21,500+\$45,600+\$46,350\right)\\ =\$124,678-\$113,450\\ =\$11,228\end{array}$

5. Calculation of sale price of shares of J Company.

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(1,000\times \$23.50\right)-\$525\\ =\$23,500-\$525\\ =\$23,248\end{array}$

6. Calculation of Gain in the sale of investment of J Company.

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$23,248-\$20,740\\ =\$2,508\end{array}$

7. Calculation of sale price of shares of J Company.

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(1,500\times \$23.90\right)-\$235\\ =\$35,850-\$235\\ =\$35,615\end{array}$

8. Calculation of loss in the sale of investment of H Company.

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale price}\\ =\$40,695-\$35,615\\ =\$5,080\end{array}$

9. Calculation of the value of purchase price of shares of S.L Company.

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(600\times \$22.50\right)+\$480\\ =\$13,500+\$480\\ =\$13,980\end{array}$

10. Calculation of the value of purchase price of shares of E.K Company.

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(900\times \$17\right)+\$198\\ =\$15,300+\$198\\ =\$15,498\end{array}$

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

$\begin{array}{c}\text{Fair value adjustment}=\mathrm{Cos}\text{t of share}-\left(\text{Fair Value}\times \text{Share}\right)\\ =\left[\begin{array}{l}\left(\$124,678-\$20,740-\$40,695+\$13,980+\$15,498\right)-\\ \left(900\times \$19.25+600\times \$20+1,200\times \$35\right)\end{array}\right]\\ =\$92,721-\left(\$17,325+\$12,000+\$42,000\right)\\ =\$92,721-\$71,325\\ =\$21,396\end{array}$

12. Calculation of the value of purchase price of shares of Mi Company.

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(2,400\times \$67\right)+\$525\\ =\$160,800+\$525\\ =\$161,325\end{array}$

13. Calculation of sale price of shares of S Company.

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(1,200\times \$48\right)-\$880\\ =\$57,600-\$880\\ =\$56,720\end{array}$

14. Calculation of gain in the sale of investment of S Company.

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$56,720-\$55,665\\ =\$1,055\end{array}$

15. Calculation of the value of purchase price of shares of B&D Company.

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,400\times \$36\right)+\$435\\ =\$50,400+\$435\\ =\$50,835\end{array}$

16. Calculation of sale price of shares of S.L Company.

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(600\times \$16.25\right)-\$435\\ =\$9,750-\$435\\ =\$9,315\end{array}$

17. Calculation of loss in the sale of investment of S.L Company.

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale price}\\ =\$13,980-\$9,315\\ =\$4,665\end{array}$

18. Calculation of sale price of shares of E.K Company.

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(900\times \$22.75\right)-\$625\\ =\$20,475-\$625\\ =\$19,850\end{array}$

19. Calculation of gain in the sale of investment of E.K Company.

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$19,850-\$15,498\\ =\$4,352\end{array}$

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

$\begin{array}{c}\text{Fair value adjustment}=\left(\text{Fair Value}\times \text{Share}\right)-\text{Cost of share}\\ =\left[\begin{array}{l}\left(1,400\times \$39+2,400\times \$69\right)\\ -\left(\begin{array}{l}\$92,721+\$161,325-\$55,665\\ +\$50,835-\$13,980-\$15,498\end{array}\right)\end{array}\right]\\ =\left[\left(\$54,600+\$165,600\right)-\$219,738\right]\\ =\$220,200-\$219,738\\ =\$462\end{array}$

2.

(a)

To determine

To prepare:

A table summarizing the total cost for the years 2015, 2016, and 2017.

Explanation of Solution

Prepare the table summarizing the total cost as shown below.

Year	Company	Cost of security ($)
2015	J	20,740
	S	55,665
	M	40,695
2016	S.L	13,980
	E.K	15,498
	S	55,665
2017	Mi	161,325
	B&D	50,835

Table – 4

(b)

To determine

To prepare:

A table summarizing the total fair value adjustment for the years 2015, 2016, and 2017.

Explanation of Solution

Prepare the table summarizing the total fair value adjustment as shown below.

Year	Company	Fair value ($)
2015	J	21,500
	S	45,600
	M	46,350
2016	S.L	12,000
	E.K	17,325
	S	42,000
2017	Mi	165,600
	B&D	54,600

Table - 5

(c)

To determine

To prepare:

A table summarizing the total fair value for the portfolio of long-term available-for-sale securities for the years 2015, 2016, and 2017.

Explanation of Solution

Prepare the table summarizing the total fair value as shown below.

Year	Cost value ($) (A)	Fair value ($) (B)	Fair value adjustment ($)$\left(\text{A}-\text{B}\right)$
2015	124,678	113,450	11,228
2016	92,721	71,325	21,396
2017	219,738	220,200	(462)

Table – 6

Conclusion

Hence, the required tables for (a), (b), and (c) are prepared as above.

3.

(a)

To determine

To prepare:

A table summarizing the realized gain or loss.

Explanation of Solution

Prepare the table summarizing the realized gain or loss as shown below.

Particulars	Sale proceeds ($) (A)	Cost ($) (B)	Gain/loss ($) $\left(\text{A}-\text{B}\right)$
1,000 shares of J Company	23,248	20,740	2,508
1,500 shares of M Company	35,615	40,695	(5,080)
1,200 shares of S Company	56,720	55,665	1,055
600 shares of S.L Company	9,315	13,980	(4,665)
900 shares of E.K Company	19,850	15,498	4,352
			(1,830)

Table – 7

Therefore, the total amount of loss worth $1,830 is to be reported in the income statement.

(b)

To determine

To prepare:

A table summarizing the unrealized gain or loss from the portfolio of long-term investment.

Explanation of Solution

Prepare the table summarizing the unrealized gain or loss as shown below.

Company	Fair value ($) (A)	Cost of security ($) (B)	Unrealized gain/loss ($) $\left(\text{A}-\text{B}\right)$
J	20,740	21,500	(760)
S	55,665	45,600	10,065
M	40,695	46,350	(5,655)
S.L	13,980	12,000	(1,980)
E.K	15,498	17,325	(1,827)
Mi	165,600	161,325	4,275
B&D	54,600	50,835	3,765
			7,883

Table - 8

Therefore, the total unrealized gain is $7,883.