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.

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,

$\begin{array}{c}\text{Cash dividend}=\text{Number of share}\times \text{Rate of dividend}\\ =20,000\times \$1.05\\ =\$21,000\end{array}$

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

$\begin{array}{c}\text{Dividend}=\text{Amount}\times \text{Rate}\\ =\text{\$82,000}\times 25\%\\ =\$20,500\end{array}$

Calculation of cash dividend of B l Company,

$\begin{array}{c}\text{Cash dividend}=\text{Number of share}\times \text{Rate of dividend}\\ =20,000\times \$1.35\\ =\$27,000\end{array}$

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

$\begin{array}{c}\text{Dividend}=\text{Amount}\times \text{Rate}\\ =\text{\$78,000}\times 25\%\\ =\$19,500\end{array}$

Calculation of value of B l stock,

$\begin{array}{c}\text{Cost of B l}=\$200,500-\$21,000+\$20,500-\$27,000+\$19,500\\ =\$192,500\end{array}$

Calculation of Gain in the sale of investment of K Company

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$375,000-\$192,500\\ =\$182,500\end{array}$

2.

To determine

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

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,

$\text{Carrying value per share}=\frac{\text{Carrying value}}{\text{Number of share}}$

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

$\begin{array}{c}\text{Carrying value per share}=\frac{\$192,500}{20,000}\\ =\$9.63\text{ per share}\end{array}$

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.

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.

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,

$\begin{array}{c}\text{Cash dividend}=\text{Number of share}\times \text{Rate of dividend}\\ =20,000\times \$1.05\\ =\$21,000\end{array}$

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

$\begin{array}{c}\text{Fair value}=\text{Number of share}\times \text{Price per share}\\ =20,000\times \$11.90\\ =\$238,000\end{array}$

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

$\begin{array}{c}\text{Fair value adjustment}=\text{Fair value}-\mathrm{Cos}\text{t of share}\\ =\$238,000-\$200,500\\ =\$37,500\end{array}$

Calculation of cash dividend of B l Company,

$\begin{array}{c}\text{Cash dividend}=\text{Number of share}\times \text{Rate of dividend}\\ =20,000\times \$1.35\\ =\$27,000\end{array}$

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

$\begin{array}{c}\text{Fair value}=\text{Number of share}\times \text{Price per share}\\ =20,000\times \$13.65\\ =\$273,000\end{array}$

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

$\begin{array}{c}\text{Fair value adjustment}=\text{Fair value}-\mathrm{Cos}\text{t of share}\\ =\$273,000-\$200,500\\ =\$72,500\end{array}$

Determine the unadjusted amount that has to be adjusted,

$$ $\begin{array}{c}\text{Amount to be adjusted}=\text{Total amount}-\text{Amount adjusted in 2017}\\ =\$72,500-\$37,500\\ =\$35,000\end{array}$

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

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$375,000-\$200,500\\ =\$174,500\end{array}$

2.

To determine

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

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,

$\text{Carrying value per share}=\frac{\text{Carrying value}}{\text{Number of share}}$

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

$\begin{array}{c}\text{Carrying value per share}=\frac{\$200,500}{20,000}\\ =\$10.03\text{ per share}\end{array}$

Thus, carrying value per share is $10.03.

3.

To determine

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

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.