Chapter 15, Problem 10QS

To determine

Concept Introduction:

Available for sale securities are recorded in the balance sheet using fair value method always.

Method of accounting $–$

Fair value method of accounting $–$ This method is used in case of the purchase when the share purchased are less than 20% of the voting rights and thus, the investor does not have significant control over the other company. Fair value adjustment method is used in order to adjust the purchase price of shares with the year-end fair market prices. It helps in providing a fair picture of the investment of shares that an investor holds.

Cost method $–$ This is used in when the investment is held for an indefinite period, i.e. the investor has an intention to hold the investment for a longer time. Under this method, the investment is recorded at the original cost at the balance sheet

Requirement 1

To determine:

The method of accounting that should be used for recording of the investment at balance sheet

To determine

Requirement 2

To prepare:

Journal entries to record (a) acquisition and (b) the sale of these shares