Chapter 13, Problem 16P

1.

To determine

Record the transactions in the books of Corporation P for the first quarter of 2019.

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.

Record the transactions in the books of Corporation P for the first quarter of 2019.

Date	Account Title and Explanation	Debit	Credit
January 1, 2019	Investment in equity securities	$11,500
	Cash (1)		$11,500
	(To record the purchase of available-for-sale securities)
February 1, 2019	Investment in available-for-sale securities $\left(\$20,000+\$12,000\right)$	$32,000
	Interest income (2)	$1,400
	Cash		$33,400
	(To record the purchase of available-for-sale securities)
February 1, 2019	Petty Cash	$500
	Cash		$500
	(To record the establishment of petty cash fund)
February 28, 2019	Cash	$1,200
	Interest income (3)		$1,200
	(To record the receipt of semi-annual interest from Company A)
February 28, 2019	Postage expense	$110.00
	Office Supplies expense	$170.65
	Transportation expense	$45.00
	Miscellaneous expense	$43.50
	Cash short and over (4)	$5.35
	Interest income		$374.50
	(To record the replenishment of fund)
March 31, 2019	Cash $\left(\$1,500+\$600\right)$	$2,100
	Interest receivable (5)	$200
	Dividend income		$1,500
	Interest income (6)		$800
	(To record the interest income, dividend income, and interest receivable)
March 31, 2019	Unrealized holding gain or loss: Equity securities $\left(\$11,500-\$10,200\right)$	$1,300
	Investment in equity securities		$1,300
	(To record the unrealized holding loss on investment)
March 31, 2019	Allowance for change in fair value of investment $\left(\$32,400-\$32,000\right)$	$400.00
	Unrealized holding gain/loss: Available for sale securities		$400.00
	To record the allowance for change in fair value of investment)
March 31, 2019	Postage expense	$140.00
	Office Supplies expense	$75.30
	Miscellaneous expense	$54.20
	Cash		$269.50
	(To record the replenishment of fund)

Table (1)

Working note (1):

Calculate the investment in available-for-sale security.

$\begin{array}{c}\text{Investment in available-for-sale security=}\left[\begin{array}{l}\text{Purchase of Corporation BL's share+}\\ \text{Purchase of Corporation BR's share+}\\ \text{Purchase of Corporation A's share}\end{array}\right]\\ =\$3,000+\$6,000+\$2,500\\ =\$11,500\end{array}$

Working note (2):

Calculate the amount of interest income paid by Corporation P.

$\begin{array}{c}\text{Interest income paid = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Fair value of Company A}\times \text{Interest rate}\times \\ \frac{\text{Number of months accrued}}{\text{12months}}\end{array}\right)+\\ \left(\begin{array}{l}\text{Fair value of Company B}\times \text{Interest rate}\times \\ \frac{\text{Number of months accrued}}{\text{12months}}\end{array}\right)\end{array}\right]\\ =\left[\left(\$20,000\times 0.12\times \frac{5}{12}\right)+\left(\$12,000\times 0.10\times \frac{4}{12}\right)\right]\\ =\$1,000+\$400\\ =\$1,400\end{array}$

Working note (3):

Calculate the amount of interest income.

$\begin{array}{c}\text{Interest income = Face value of bond}\times \text{Interest rate }\times \frac{\text{6months}}{12\text{months}}\\ =\$20,000\times 12\%\times \frac{6}{12}\\ =\$1,200\end{array}$

Working note (4):

Calculate the amount of cash short and over.

$\begin{array}{c}\text{Cash short and over =}\left[\begin{array}{l}\text{Cash on hand remained in petty cash fund}-\\ \left(\begin{array}{l}\text{Established petty cash fund on February 1}-\\ \text{Postage expense+ Office supplies expense}+\\ \text{Transportation expense}+\text{Miscellaneous expense}\end{array}\right)\end{array}\right]\\ =\left[\$125.50-\left(\$500-\$110+\$170.65+\$45+\$43.50\right)\right]\\ =\left[\$125.50-\left(\$130.85\right)\right]\\ =\$5.35\end{array}$

Working note (5):

Calculate the amount of accrued interest on Company A’s bond.

$\begin{array}{c}\text{Interest income = Face value of bond}\times \text{Interest rate }\times \frac{\text{Accrued number of month}}{12\text{months}}\\ =\$20,000\times 12\%\times \frac{1}{12}\\ =\$200\end{array}$

Working note (6):

Calculate the amount of interest income.

$\begin{array}{c}\text{Interest income = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Fair value of Company B}\times \text{Interest rate}\times \\ \frac{\text{Number of months accrued}}{\text{12months}}\end{array}\right)+\\ \left(\begin{array}{l}\text{Fair value of Company A}\times \text{Interest rate}\times \\ \frac{\text{Number of months accrued}}{\text{12months}}\end{array}\right)\end{array}\right]\\ =\left[\left(\$12,000\times 0.10\times \frac{6}{12}\right)+\left(\$20,000\times 0.12\times \frac{1}{12}\right)\right]\\ =800.00\end{array}$

2.

To determine

Prepare bank reconciliation for Corporation P for March 31, 2019.

Explanation of Solution

Bank Reconciliation Statement: Bank statement is prepared by bank. The company maintains its own records from its perspective. Bank reconciliation is the statement prepared by company to remove the differences and disagreement between cash balance per bank and cash balance per books.

Prepare bank reconciliation for Corporation P for March 31, 2019.

Corporation P
Bank reconciliation
March 31, 2019
Particulars	Amount	Amount
Balance per bank statement		$13,459.75
Add: Deposit in transit		$2,100.00
		$15,559.75
Less: Outstanding checks		($2,365.40)
Adjusted cash balance		$13,194.35
Balance per company records		$11,689.95
Add: Note collected by bank	$1,500.00
Interest on note	100	$1,600.00
		$13,289.95
Less: Bank service charge	20.00
NSF check returned	75.6	($95.60)
Adjusted cash balance		$13,194.35

Table (2)

3.

To determine

Record the journal entry to adjust the Corporation P’s books on March 31, 2019.

Explanation of Solution

Record the journal entry to adjust the Corporation P’s books on March 31, 2019.

Date	Account Title and Explanation	Debit	Credit
March 31, 2019	Cash	$1,600
	Notes receivable		$1,500
	Interest income		$100
	(To adjust the cash balance in company records to recognize the income received in bank account)
March 31, 2019	Miscellaneous expense	$20.00
	Accounts receivable	$75.60
	Cash		$95.60
	(To adjust the cash balance in company records to recognize the expense and receivable)

Table (3)