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a)
Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.
Available-for-sale (AFS) securities: These are short-term or long-term investments in debt and equity securities with an intention of holding the investment for some strategic purposes like meeting liquidity needs or manage interest risk.
Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and
stockholders’ equities . - Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
To Prepare: The
a)
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Explanation of Solution
Journalize the stock transactions occurred during 2016.
Transaction on February 21, 2016:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
02.21.16 | Investment in Corporation DT Shares | 400,000 | ||
Cash | 400,000 | |||
(To record purchase of investment in shares) |
Table (1)
Transaction on March 18, 2016:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
03.18.16 | Cash | 8,000 | ||
Investment Revenue | 8,000 | |||
(To record receipt of dividends) |
Table (2)
Transaction on September 1, 2016:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
09.01.16 | Investment in AT Bonds | 900,000 | ||
Cash | 900,000 | |||
(To record purchase of investment) |
Table (3)
Transaction on October 20, 2016:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
10.20.16 | Cash | 425,000 | ||
Investment in Corporation DT Shares | 400,000 | |||
Gain on Sale of Investments | 25,000 | |||
(To record sale of Corporation DT shares) |
Table (4)
Working Notes:
Compute the gain (loss) on sale of shares.
Particulars | Amount ($) |
Cash proceeds from sale | $425,000 |
Less: Cost of investment | (400,000) |
Gain (loss) on sale of shares | $25,000 |
Table (5)
Transaction on November 1, 2016:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
11.01.16 | Investment in Corporation M Shares | 1,400,000 | ||
Cash | 1,400,000 | |||
(To record purchase of investment in shares) |
Table (6)
Interest accrued on AT bonds on December 31, 2016:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
12.31.16 | Investment Revenue Receivable (1) | 30,000 | ||
Investment Revenue | 30,000 | |||
(To record accrued interest revenue) |
Table (7)
Working Notes:
Calculate interest to be received on December 31, 2016.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
12.31.16 | Fair Value Adjustment | 10,000 | ||
Net Unrealized Holding Gains and Losses–Other Comprehensive Income |
10,000 | |||
(To record adjustment of available-for-sale securities to fair market value) |
Table (8)
Working Notes:
Compute the net unrealized holding gain (loss) as on December 31, 2016.
Security | Fair Value | – | Amortized Cost | = | Fair Value Adjustment |
Corporation MD Shares | $1,460,000 | – | $1,400,000 | = | $60,000 |
AT Bonds | 850,000 | – | 900,000 | = | (50,000) |
Total | 2,300,000 | – | 2,310,000 | = | 10,000 |
Existing balance in fair value adjustment | (0) | ||||
Increase (decrease) needed in fair value adjustment | $10,000 |
Table (9)
b)
To Prepare: The income statement and
b)
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Explanation of Solution
Reporting on income statement:
Income Statement | |
Particulars | Amount |
Other income (expenses): | |
Interest and dividend income | $38,000 |
Realized net gain on sale of investments | $25,000 |
Tax expense | |
Net income |
Table (10)
Notes:
- Refer to requirement 1 for values of interest and dividend income, and gain on sale of investments.
- Net unrealized holding gains and losses are reported in other comprehensive income.
Reporting on statement of comprehensive income:
Statement of Comprehensive Income | |
Particulars | Amount |
Other comprehensive income (loss) items (OCI): | |
Net unrealized holding gains and losses on investments | $10,000 |
Table (11)
Note: Refer to requirement 1 for values and computation of net unrealized holding gains and losses.
Reporting on balance sheet:
Balance Sheet | ||
Particulars | Amount | Amount |
Current assets: | ||
Investment revenue receivable | $30,000 | |
Securities available-for-sale | $2,300,000 | |
Add: Fair value adjustment | 10,000 | 2,310,000 |
Shareholders’ equity: | ||
Accumulated other comprehensive income | ||
Net unrealized holding gains and losses | 10,000 |
Table (12)
Note: Refer to requirement 1 for values of interest income, and net unrealized holding gains and losses amounts.
c)
To Prepare: The journal entries needed to enable the investment to be reported at this amount.
c)
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Explanation of Solution
Journalize the stock transactions occurred during 2017.
Transaction on January 20, 2017:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
01.20.17 | Cash | 1,485,000 | ||
Investment in Corporation M Shares |
1,400,000 | |||
Gain on Sale of Investments | 85,000 | |||
(To record sale of Corporation M shares) |
Table (13)
Working Notes:
Compute the gain (loss) on sale of shares.
Particulars | Amount ($) |
Cash proceeds from sale | $1,485,000 |
Less: Cost of investment | (1,400,000) |
Gain (loss) on sale of shares | $85,000 |
Table (14)
Transaction on March 1, 2017:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
03.01.17 | Cash | 45,000 | ||
Investment Revenue Receivable | 30,000 | |||
Investment Revenue (2) | 15,000 | |||
(To record interest received) |
Table (15)
Working Notes:
Calculate the value of interest revenue.
Transaction on August 12, 2017:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
08.12.17 | Investment in V Communication Shares | 650,000 | ||
Cash | 650,000 | |||
(To record purchase of investment in shares) |
Table (16)
Transaction on September 1, 2017:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
09.01.17 | Cash | 45,000 | ||
Investment Revenue (3) | 45,000 | |||
(To record interest received) |
Table (17)
Working Notes:
Calculate the value of investment revenue.
Interest accrued on AT bonds on December 31, 2017:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
12.21.17 | Investment Revenue Receivable | 30,000 | ||
Investment Revenue (4) | 30,000 | |||
(To record accrued interest revenue) |
Table (18)
Working Notes:
Calculate interest to be received on December 31, 2017.
Adjusting entry on December 31, 2017:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) |
31.12.17 | Net Unrealized Holding Gains and Losses–Other Comprehensive Income | 60,000 | ||
Fair Value Adjustment | 60,000 | |||
(To record adjustment of available-for-sale securities to fair market value) |
Table (19)
Working Notes:
Compute the net unrealized holding gain (loss) as on December 31, 2017.
Security | Fair Value | – | Amortized Cost | = | Fair Value Adjustment |
V Communication Shares | $670,000 | – | $650,000 | = | $20,000 |
AT Bonds | 830,000 | – | 900,000 | = | (70,000) |
Total | 1,500,000 | – | 1,550,000 | = | (50,000) |
Existing balance in fair value adjustment | 10,000 | ||||
Increase (decrease) needed in fair value adjustment | $(60,000) |
Table (20)
Note: With a positive balance of $10,000 in 2016, and to maintain a negative balance of $50,000 in 2017, a negative of $60,000 is assumed as decrease needed in fair value adjustment.
d)
To Prepare: The income statement and balance sheet.
d)
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Explanation of Solution
Reporting on income statement:
Income Statement | |
Particulars | Amount ($) |
Other income (expenses): | |
Interest and dividend income | $90,000 |
Realized net gain on sale of investments | 85,000 |
Tax expense | |
Net income |
Table (21)
Notes:
- Refer to requirement 3 for values of interest and dividend income, and gain on sale of investments.
- Net unrealized holding gains and losses are reported in other comprehensive income.
Reporting on statement of comprehensive income:
Statement of Comprehensive Income | |
Particulars | Amount ($) |
Other comprehensive income (loss) items (OCI): | |
Net unrealized holding gains and losses on investments | (60,000) |
Table (22)
Note: Refer to requirement 3 for values and computation of net unrealized holding gains and losses.
Reporting on balance sheet:
Balance Sheet | ||
Particulars | Amount ($) | Amount ($) |
Current assets: | ||
Investment revenue receivable | $30,000 | |
Securities available-for-sale | $1,550,000 | |
Add: Fair value adjustment | (50,000) | 1,500,000 |
Shareholders’ equity: | ||
Accumulated other comprehensive income | ||
Net unrealized holding gains and losses | (50,000) |
Table (23)
Note: Refer to requirement 3 for values of interest income, and net unrealized holding gains and losses amounts
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Chapter 12 Solutions
Intermediate Accounting w/ Annual Report; Connect Access Card
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