Financial & Managerial Accounting: Information for Decisions w Access Card, 5th edition, ACC 211 & 212, Northern Virginia Community College
Financial & Managerial Accounting: Information for Decisions w Access Card, 5th edition, ACC 211 & 212, Northern Virginia Community College
5th Edition
ISBN: 9781259347641
Author: Ken W. Shaw, Barbara Chiappetta John J. Wild
Publisher: McGraw Hill Education
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Chapter C, Problem 4PSB
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.

Long Term Investment:

Long term investment is the investment for long period generally for more than one year. The long term investment helps in the purchase of fixed assets, expansion, or for growth of the company. It shows under assets head of the balance sheet.

Part 1

1.

To prepare: Journal entries to record the transactions.

Expert Solution
Check Mark

Explanation of Solution

For the year 2017,

To record purchase of B l common stock

Date Account Title and Explanation Post ref Debit ($) Credit ($)
Jan 5 Long term investment Trading securities 200,500
Cash 200,500
(Being long term investment purchase against cash)
Table (1)
  • The long term investment of B Company is increase. The long term investment is the asset of the company and the asset of B Company also increases.
  • The cash account is decrease by $200,500, and the credit of cash means that the current asset of the company also decreases.

To record dividend received in cash from B l.

Date Account Title and Explanation Post ref Debit ($) Credit ($)
August 1 Cash 21,000
Long term investment 21,000
(Being cash dividend received)
Table (2)
  • Cash account debit as cash is received from B l Company as cash dividend,
  • As per equity method the dividend amount is credited to the long term investment account.

To record closing entry as on December 31, 2017

Date Account Title and Explanation Post ref Debit ($) Credit ($)
December 31 Long term investment 20,500
Earnings from long term investment 20,500
(Being equity in investee earning recorded)
Table (3)
  • The long term investment is increase by $20,500 because of the dividend calculation as on December 31, 2017.
  • Earnings from long term investment account are link with the net income, if this account is credited the net income of B Company increases.

For the year 2018,

To record dividend received in cash from B l.

Date Account Title and Explanation Post ref Debit ($) Credit ($)
August 1 Cash 27,000
Long term investment 27,000
(Being cash dividend received)
Table (4)
  • Cash account debit as cash is received from B l Company as cash dividend.
  • As per equity method the dividend amount is credited to the long term investment account.

To record closing entry as on December 31, 2018

Date Account Title and Explanation Post ref Debit ($) Credit ($)
Dec 31 Long term investment 19,500
Earnings from long term investment 19,500
(Being equity in investee earning recorded)
Table (5)
  • The long term investment is increase by $19,500 because of the dividend calculation as on December 31, 2017.
  • Earnings from long term investment account are link with the net income, if this account is credited the net income of B Company increases.

For the year 2019,

To record sale of B l stock

Date Account Title and Explanation Post ref Debit ($) Credit ($)
January 8 Cash 375,000
Gain on sale of long term investment 182,500
Long term investment 192,500
(Being long term investment sold at a gain of $154,000 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 long term investment, the long term investment account decreases and the asset of the company also decreases with $192,500 amount.
  • At the time of sale B Company receives the gain on sale of investment and this gain is credited to the gain on sale of long term investment account.

Working notes:

Calculation of cash dividend of B l Company,

    Cash dividend=Number of share×Rate of dividend =20,000×$1.05 =$21,000

Calculation of amount of dividend as on December 31, 2017,

    Dividend=Amount×Rate =$82,000×25% =$20,500

Calculation of cash dividend of B l Company,

    Cash dividend=Number of share×Rate of dividend =20,000×$1.35 =$27,000

Calculation of amount of dividend as on December 31, 2018,

    Dividend=Amount×Rate =$78,000×25% =$19,500

Calculation of value of B l stock,

    Cost of B l=$200,500$21,000+$20,500$27,000+$19,500 =$192,500

Calculation of Gain in the sale of investment of K Company

    Gain=Sale PriceCost of short term investment =$375,000$192,500 =$182,500

2.

To determine

To compute: Carrying book value per share of B Company investment in B l common stock.

2.

Expert Solution
Check Mark

Explanation of Solution

Calculated values,
Carrying value as on sale of date is $192,500.
Number of share is 20,000.

Formula to calculate carrying value per share is,

    Carrying value per share= Carrying value Number of share

Substitute $ 192,500 for carrying value and 20,000 for number of share in the above equation.

    Carrying value per share= $192,500 20,000 =$9.63 per share

Working notes:

Statement showing carrying book value of B l common stock

Particulars Amount ($)
Actual cost 200,500
Less: Dividend 2017 21,000
Add: Earning in 2017 20,500
Less: Dividend 2018 27,000
Add: Earning in 2018 19,500
Carrying value as on sale of date 192,500
Table (7)

Thus, carrying value per share is $29.

3.

To determine

To compute: The net increase or decrease in S Company equity.

3.

Expert Solution
Check Mark

Explanation of Solution

Statement shows increase or decrease in the amount of equity of B Company,

Particulars Amount ($)
Earning from B l in 2017 20,500
Earning from B l in 2018 19,500
Gain on sale of investment 182,500
Net increase in equity 222,500
Table (8)

Thus, increase in equity is $222,500.

Part 2

1.

To determine

To prepare: Journal entries when the investment is available for sale security.

Part 2

1.

Expert Solution
Check Mark

Explanation of Solution

For the year 2017,

To record purchase of B l common stock

Date Account Title and Explanation Post ref Debit ($) Credit ($)
Jan 5 Long term investment Trading securities 200,500
Cash 200,500
(Being long term investment purchase against cash)
Table (9)
  • The long term investment of B Company is increase. The long term investment is the asset of the company and the asset of B Company also increases.
  • The cash account is decrease by $200,500, and the credit of cash means that the current asset of the company also decreases.

To record dividend received in cash from B l.

Date Account Title and Explanation Post ref Debit ($) Credit ($)
August 1 Cash 21,000
Long term investment 21,000
(Being cash dividend received)
Table (10)
  • Cash account debit as cash is received from B l Company as cash dividend,
  • As per equity method the dividend amount is credited to the long term investment account.

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

Date Account Title and Explanation Post ref Debit ($) Credit ($)
December 31 Fair value adjustment long term investment 37,500
Unrealized gain- Equity 37,500
(Being unrealized gain earned of $37,500 at the time of closing)
Table (11)
  • The fair value adjustment account is an adjustment account to account for the unrealized gain earn by B Company.
  • The fair value of long term investment is less than the cost of share so the S Company earn an unrealized gain of $37,500, and unrealized gain increases the balance of income.

For the year 2018,

To record dividend received in cash from B l.

Date Account Title and Explanation Post ref Debit ($) Credit ($)
August 1 Cash 27,000
Long term investment 27,000
(Being cash dividend received)
Table (12)
  • Cash account debit as cash is received from B l Company as cash dividend,
  • As per equity method the dividend amount is credited to the long term investment account.

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

Date Account Title and Explanation Post ref Debit ($) Credit ($)
December 31 Fair value adjustment long term investment 35,000
Unrealized gain- Equity 35,000
(Being unrealized gain earned of $35,000 at the time of closing)
Table (13)
  • The fair value adjustment account is an adjustment account to account for the unrealized gain earn by B Company.
  • The fair value of long term investment is less than the cost of share so the S Company earn an unrealized gain of $35,000, and unrealized gain increases the balance of income.

For the year 2019,

To record sale of B l stock

Date Account Title and Explanation Post ref Debit ($) Credit ($)
January 8 Cash 375,000
Gain on sale of long term investment 174,500
Long term investment 200,500
(Being long term investment sold at a gain of $154,000 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 long term investment, the long term investment account decreases and the asset of the company also decreases with $200,500 amount.
  • At the time of sale B Company receives the gain on sale of investment and this gain is credited to the gain on sale of long term investment account.

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

Date Account Title and Explanation Post ref Debit ($) Credit ($)
December 31 Fair value adjustment long term investment 72,500
Unrealized gain- Equity 72,500
(Being unrealized gain earned of $72,500 at the time of closing)
Table (15)
  • The fair value adjustment account is an adjustment account to account for the unrealized gain earn by B Company.
  • The fair value of long term investment is less than the cost of share so the S Company earn an unrealized gain of $72,500, and unrealized gain increases the balance of income.

Working notes:

Calculation of cash dividend of B l Company,

    Cash dividend=Number of share×Rate of dividend =20,000×$1.05 =$21,000

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

    Fair value=Number of share×Price per share =20,000×$11.90 =$238,000

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

    Fair value adjustment=Fair valueCost of share =$238,000$200,500 =$37,500

Calculation of cash dividend of B l Company,

    Cash dividend=Number of share×Rate of dividend =20,000×$1.35 =$27,000

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

    Fair value=Number of share×Price per share =20,000×$13.65 =$273,000

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

    Fair value adjustment=Fair valueCost of share =$273,000$200,500 =$72,500

Determine the unadjusted amount that has to be adjusted,

    Amount to be adjusted=Total amountAmount adjusted in 2017 =$72,500$37,500 =$35,000

Calculation of Gain in the sale of investment of K Company,

    Gain=Sale PriceCost of short term investment =$375,000$200,500 =$174,500

2.

To determine

To compute: Carrying book value per share of B Company investment in B l common stock.

2.

Expert Solution
Check Mark

Explanation of Solution

Calculated values,
Carrying value as on sale of date is $200,500.
Number of share is 20,000.

Formula to calculate carrying value per share is,

    Carrying value per share= Carrying value Number of share

Substitute $ 200,500 for carrying value and 20,000 for number of share in the above equation.

    Carrying value per share= $200,500 20,000 =$10.03 per share

Thus, carrying value per share is $10.03.

3.

To determine

To compute: The net increase or decrease in B Company equity.

3.

Expert Solution
Check Mark

Explanation of Solution

Statement shows increase or decrease in the amount of equity of B Company,

Particulars Amount ($)
Earning from B in 2017 21,000
Earning from B in 2018 27,000
Gain on sale of investment 174,500
Net increase in equity 222,500
Table (16)

Thus, increase in equity is $222,500.

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