Chapter D, Problem D.1AP

(1)

To determine

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.

To record: each of these investment transactions.

Answer to Problem D.1AP

Prepare the journal entries for each of these transactions.

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

Table (1)

Explanation of Solution

Common stocked purchased:

• Investments are the assets. Purchase of the common stock increases the investments. Thus, investments are debited with $105,000 $\left(1,500\text{shares}\times \text{\$70}\text{per share}\right)$.
• 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 $\left(600\text{shares}\times \text{\$12}\text{per share}\right)$.
• 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 $\left(300\text{shares}\times \text{\$62}\text{per share}\right)$.
• 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 $\left(300\text{shares}\times \text{\$70}\text{per share}\right)$.

Dividend received:

• Cash is a current asset. Dividend revenue increases the cash balance. Thus, cash is debited with $900 $\left[\left(1,200\text{shares}\times \text{\$0}\text{.5}\text{per share}\right)+\left(600\text{shares}\times \text{\$0}\text{.5}\text{per share}\right)\right]$.
• 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 $\left[\left(1,200\text{shares}\times \text{\$}\left(70-73\right)\text{per share}\right)+\left(600\text{shares}\times \text{\$}\left(12-14\right)\text{per share}\right)\right]$.
• 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 $\left[\$3,600+\$1,200\right]$.

(2)

To determine

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.

To calculate: the balance in the Investments account as of December 31.

Answer to Problem D.1AP

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

Explanation of Solution

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

Particulars	Common stock	Preferred stock
Investments purchased	105,000	7,200
Less: sale of common stock	(21,000)
Add: fair value adjustment	3,600	1,200
Investments as of December 31	87,600	8,400

Table (2)