Financial Accounting
Financial Accounting
5th Edition
ISBN: 9781259914898
Author: SPICELAND
Publisher: MCG
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Chapter D, Problem 1PA

(1)

To determine

Record each of the investment transactions.

(1)

Expert Solution
Check Mark

Explanation of Solution

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

Prepare the journal entries for each of these transactions.

DateAccount title and explanation

Post

ref.

Debit

$

Credit

$

January 2Investments 105,000 
 Cash  105,000
 (To record the purchase of common stock)   
 
February 14Investments 7,200 
 Cash  7,200
 (To record the purchase of preferred stock)   
 
May 15Cash 18,600 
 Loss (difference amount) 2,400 
 Investments  21,000
 (To record the sale of common stock)   
 
December 30Cash 900 
 Dividend revenue  900
 (To record the dividend revenue)   
 
December 31Investments 4,800 
 Unrealized Holding gain (other comprehensive income)  4,800
 (To record the adjusted fair value of the common and preferred stock)   

Table (1)

Common stocked purchased:

  • Investments are the assets. Purchase of the common stock increases the investments. Thus, investments are debited with $105,000(1,500shares×$70per share).
  • Cash is a current asset. Purchase of common stock decreases the cash balance. Thus, cash is credited with $105,000.

Purchase of preferred stock:

  • Investments are the assets. Purchase of the common stock increases the investments. Thus, investments are debited with $7,200(600shares×$12per share).
  • Cash is a current asset. Purchase of common stock decreases the cash balance. Thus, cash is credited with $7,200.

Common stock sold @ $62 per share:

  • Cash is a current asset. Sale of common stock increases the cash balance. Thus, cash is debited with $18,600(300shares×$62per share).
  • Loss is a component of owners’ equity. Loss decreases the owners’ equity. Thus, loss is debited with $2,400.
  • Investments are the assets. Sale of the common stock decreases the investments. Thus, investments are credited with $21,000(300shares×$70per share).

Dividend received:

  • Cash is a current asset. Dividend revenue increases the cash balance. Thus, cash is debited with $900[(1,200shares×$0.5per share)+(600shares×$0.5per share)].
  • Dividend revenue is a component of owners’ equity. Dividend revenue increases the owners’ equity. Thus, dividend revenue is credited with $900.

Fair value adjustment:

  • Investments are the assets. Changes (increase) in the fair value of the common stock and preferred stock increases the investments. Thus, investments are debited with $4,800[(1,200shares×$(7073)per share)+(600shares×$(1214)per share)].
  • Unrealized Holding gain is a component of other comprehensive income. It increases the balance of the other comprehensive income. Thus, unrealized Holding gain (other comprehensive income) is credited with $4,800[$3,600+$1,200].

(2)

To determine

Calculate the balance in the Investments account as of December 31.

(2)

Expert Solution
Check Mark

Answer to Problem 1PA

The balance in the investment account as of December 31 is $96,000($87,600+$8,400).

Explanation of Solution

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

Calculate the balance in the investment account as of December 31.

ParticularsCommon stockPreferred stock
Investments purchased105,0007,200
Less: sale of common stock(21,000) 
Add: fair value adjustment3,6001,200
Investments as of December 3187,6008,400

Table (2)

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