Chapter 12, Problem 12.9E

1.

To determine

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.

Fair value: Fair value is the price at which, both seller and buyer agree to exchange the asset. So, fair value is the selling price to the seller and the purchase price for the buyer.

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 Journalize: The investment made by Company CF on March 2, 2016.

Explanation of Solution

Prepare the journal entry to record the investment made by Company CF.

Date	Account Title	Post ref.	Debit ($)	Credit ($)
03.02.16	Investment in  shares of Company PG		$31,000,000
	Cash			$31,000,000
	(To record the investment made in Company PG)

 Table (1)

• Investment in shares is an asset account. Since shares investments are purchased, asset value increased, and an increase in asset is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Prepare the journal entry to record the investment made by Company CF.

Date	Account Title	Post ref.	Debit ($)	Credit ($)
04.12.16	Investment in  bonds of Company Z		$20,000,000
	Cash			$20,000,000
	(To record the investment made in Company Z)

 Table (2)

• Investment in Bonds is an asset account. Since bonds investments are purchased, asset value increased, and an increase in asset is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Prepare the journal entry to record the dividend received by Company CF.

Date	Account Title	Post ref.	Debit ($)	Credit ($)
07.18.16	Cash		$2,000,000
	Interest Revenue			$2,000,000
	(To record the interest received)

Table (3)

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.

Prepare the journal entry to record the semiannual interest received by Company CF.

Date	Account Title	Post ref.	Debit ($)	Credit ($)
10.15.16	Cash		$1,000,000
	Interest Revenue			$1,000,000
	(To record the interest received)

Table (4)

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.

Prepare the journal entry to record the sale of bonds of Company Z, by Company CF.

Date	Account Title	Post ref.	Debit ($)	Credit ($)
10.16.16	Cash		$21,000,000
	Investment in  bonds of Company Z			$20,000,000
	Gain on sale of investments  (1)			$1,000,000
	(To record the sale of the bonds of Company Z )

Table (5)

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Investment in Bonds is an asset account. Since bond investments are sold, asset value decreased, and a decrease in asset is credited.
• Gain on sale of investments is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.

Working Notes:

Compute the gain on sales of bonds of Company Z.

$\begin{array}{c}\text{Gain = Cash received}-\text{Investment}\\ \text{= }\$21,000,000-\$20,000,000\\ =\text{\$}1,000,000\end{array}$ (1)

Prepare the journal entry to record the investment made by Company CF.

Date	Account Title	Post ref.	Debit ($)	Credit ($)
11.01.16	Investment in  shares of Company L		$40,000,000
	Cash			$40,000,000
	(To record the investment made in Company L)

 Table (6)

• Investment in shares is an asset account. Since shares investments are purchased, asset value increased, and an increase in asset is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Compute the accumulated unrealized gains or loss on investments of Company CF.

Available-for-Sale Securities	Fair Value	-	Cost	=	Accumulated Unrealized Gains /  Loss
Shares of Company PG	(2) $32,000,000	+	$31,000,000	=	$1,000,000
Shares of Company L	(3) $37,000,000	+	$40,000,000	=	($3,000,000)
Total as on Dec. 31, 2016	$69,000,000	+	$71,000,000	=	($2,000,000)

Table (7)

Working Notes:

Compute the fair value of shares of Company PG.

$\begin{array}{c}\text{Value = Number of shares }\times \text{ Cost of shares}\\ \text{= \$32}\times 1,000,000\\ =\text{ \$32,000},000\end{array}$ (2)

Compute the fair value of shares of Company L.

$\begin{array}{c}\text{Value = Number of shares }\times \text{ Cost of shares}\\ \text{= \$74}\times 500,000\\ =\text{ \$37,000},000\end{array}$ (3)

Prepare the journal entry to record the value of bonds available with Company CF as on December 31, 2016.

Date	Account Title	Post ref.	Debit ($)	Credit ($)
12.31.16	Unrealized holding loss—OCI		$2,000,000
	Fair value adjustment			$2,000,000
	(To record the gain on adjustment)

Table (8)

• Unrealized Holding Loss–OCI is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses reduce stockholders’ equity value, stockholders’ equity value is debited.
• Fair Value Adjustment is a contra-asset account which serves the purpose of valuation allowance account. The account is credited because the market price was decreased (loss) to $69,000,000 from the cost of $71,000,000.

Prepare the journal entry to record the sale of bonds of Company Z, by Company CF.

Date	Account Title	Post ref.	Debit ($)	Credit ($)
01.23.17	Cash  (4)		$16,000,000
	Investment in shares of Company PG			$15,500,000
	Gain on sale of investments  (5)			$500,000
	(To record the sale of the shares of Company PG )

Table (9)

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Investment in shares is an asset account. Since shares investments are sold, asset value decreased, and a decrease in asset is credited.
• Gain on sale of investments is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.

Working Notes:

Compute the cash received on sale of shares of Company PG.

$\begin{array}{c}\text{Cash = Number of shares }\times \text{ Price of shares}\\ \text{= 5}00,000\text{ shares }\times \text{ \$32}\\ \text{= \$16,000,000}\end{array}$ (4)

Compute the gain on sale of shares of Company PG.

$\begin{array}{c}\text{Gain = Cash received}-\text{Investment}\\ \text{= }\$16,000,000-\$15,500,000\\ =\text{\$}500,000\end{array}$ (5)

Prepare the journal entry to record the sale of bonds of Company Z, by Company CF.

Date	Account Title	Post ref.	Debit ($)	Credit ($)
03.01.17	Cash  (6)		$38,000,000
	Loss on sale of investments  (7)		$2,000,000
	Investment in  shares of Company L			$40,000,000
	(To record the sale of the shares of Company L )

Table (10)

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Loss on Sale of Investments is a loss account. Since losses and expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Investment in shares is an asset account. Since shares investments are sold, asset value decreased, and a decrease in asset is credited.

Working Notes:

Compute the cash received on sale of shares of Company PG.

$\begin{array}{c}\text{Cash = Number of shares }\times \text{ Price of shares}\\ \text{= 5}00,000\text{ shares }\times \text{ \$76}\\ \text{= \$38,000,000}\end{array}$ (6)

Compute the gain on sale of shares of Company PG.

$\begin{array}{c}\text{Loss = Investment }-\text{Cash received}\\ \text{= }\$40,000,000-\$38,000,000\\ =\text{\$}2,000,000\end{array}$ (7)

2)

To determine

To Prepare: The income statement of Company CF as on December 31, 2016.

Explanation of Solution

Other Comprehensive income: OCI includes all financial items which result in changes in the stockholders’ equity, other than stock investments and dividends.

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Company CF
Income Statement
For the year ended December 31 , 2016
Particulars	Amount ($)	Amount ($)
Revenues
Investment revenue	$3,000,000
Gain on sale of investments	$1,000,000
Other comprehensive income:
Net unrealized holding gains and losses on investments		$2,000,000

Table (11)

The net income of Company CF is $2,000,000