Principles of Financial Accounting.
Principles of Financial Accounting.
24th Edition
ISBN: 9781260158625
Author: Wild
Publisher: MCG
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Chapter 15, Problem 1AP

1.

To determine

Prepare the journal entries to record the given transactions.

1.

Expert Solution
Check Mark

Explanation of Solution

Debt investments:

The investments which are made by the investors in debts instrument is called as debt investment. Debt investments lend funds to the borrowing company with predetermined agreement for interest and maturity date. Corporate bonds, government bonds and certificate of deposits are examples of debt investment.

Prepare the journal entries to record the given transactions as follows:

August 2 – Purchased Company V’s bonds

DateAccount Titles and DescriptionPost Ref.Debit ($)Credit ($)
August, 2Debt investment - Trading 10,000 
    Cash  10,000
(To record purchase of trading securities)   

Table (1)

  • Debt investment – Trading is an asset account, and it increases the value of assets by $10,000. Hence, debit the debt investment –trading with $10,000.
  • Cash is an asset account and it decreases the value of asset by $10,000. Therefore, credit the cash account for $10,000.

September 7– Purchased Company A’s bonds

DateAccount Titles and DescriptionPost Ref.Debit ($)Credit ($)
September 7Debt investment - Trading 35,000 
    Cash  35,000
(To record purchase of trading securities)   

Table (2)

  • Debt investment – Trading is an asset account, and it increases the value of assets by $35,000. Hence, debit the debt investment –trading with $35,000.
  • Cash is an asset account and it decreases the value of asset by $35,000. Therefore, credit the cash account for $35,000.

September 12– Purchased Company M’s bonds

DateAccount Titles and DescriptionPost Ref.Debit ($)Credit ($)
September 12Debt investment - Trading 20,000 
    Cash  20,000
(To record purchase of trading securities)   

Table (3)

  • Debt investment – Trading is an asset account, and it increases the value of assets by $20,000. Hence, debit the debt investment –trading with $20,000.
  • Cash is an asset account and it decreases the value of asset by $20,000. Therefore, credit the cash account for $20,000.

October 21 – Company K sold Company V’s bond at $2,000 cost.

DateAccount Titles and DescriptionPost Ref.Debit ($)Credit ($)
October 21Cash 2,100 
    Gain on sale of debt investment (1)  100
    Debt investment-Trading   2,000
 (To record the sale of trading securities in cash)   

Table (4)

  • Cash is an asset account and it increases the value of asset by $2,100. Therefore, debit the cash account for $2,100.
  • Gain on sale of trading is a component of owner’s equity (revenue), and it increases the value of equity by $100. Hence, credit the gain on sale of trading securities account with $100.
  • Debit investment – Trading is an asset account, and it decreases the value of assets by $2,000. Hence, credit the debt investment account with $2,000.

Working note:

Calculate the gain on sale debt investment

Gain on saleof trading securities} = Cash received Cost of trading securities=$2,100$2,000=$100 (1)

October 23 – Company K sold Company V’s bond at $15,000 cost.

DateAccount Titles and DescriptionPost Ref.Debit ($)Credit ($)
October 23Cash 15,400 
    Gain on sale of debt investment (2)  400
    Debt investment-Trading   15,000
 (To record the sale of trading securities in cash)   

Table (5)

  • Cash is an asset account and it increases the value of asset by $15,400. Therefore, debit the cash account for $15,400.
  • Gain on sale of trading is a component of owner’s equity (revenue), and it increases the value of equity by $400. Hence, credit the gain on sale of trading securities account with $400.
  • Debit investment – Trading is an asset account, and it decreases the value of assets by $15,000. Hence, credit the debt investment account with $15,000.

Working note:

Calculate the gain on sale debt investment

Gain on saleof trading securities} = Cash received Cost of trading securities=$15,400$15,000=$400 (2)

November 1– Purchased Company W’s bonds

DateAccount Titles and DescriptionPost Ref.Debit ($)Credit ($)
November 1Debt investment - Trading 40,000 
    Cash  40,000
(To record purchase of trading securities)   

Table (6)

  • Debt investment – Trading is an asset account, and it increases the value of assets by $40,000. Hence, debit the debt investment –trading with $40,000.
  • Cash is an asset account and it decreases the value of asset by $40,000. Therefore, credit the cash account for $40,000.

December 10– Company K sold Company M’s bond at $18,000 cash.

DateAccount Titles and DescriptionPost Ref.Debit ($)Credit ($)
December 10Cash 18,000 
Loss on sale of debt investment (3) 2,000 
    Debt investment-Trading   20,000
 (To record the sale of trading securities in cash)   

Table (7)

  • Cash is an asset account and it increases the value of asset by $18,000. Therefore, debit the cash account for $18,000.
  • Loss on sale of trading is a component of owner’s equity (loss), and it decreases the value of equity by $2,000. Hence, debit the loss on sale of trading securities account with $2,000.
  • Debit investment – Trading is an asset account, and it decreases the value of assets by $20,000. Hence, credit the debt investment account with $20,000.

Working note:

Calculate the loss on sale debt investment

Loss on saleof trading securities} = Cost of trading securitiesCash received=$20,000$18,000=$2,000 (3)

2.

To determine

Prepare a table to compare the year-end cost and fair values of the given debt securities.

2.

Expert Solution
Check Mark

Explanation of Solution

Prepare a table to compare the year-end cost and fair values of the given debt securities as follows:

Portfolio of Trading SecuritiesCost Fair ValueUnrealized Gain (Loss)
Company V's bonds8,000 (4)8,500
Company A's bonds20,000 (5)22,000
Company W's bonds40,00039,000
 68,00069,5001,500 (6)

Table (8)

Working note:

Calculate the cost of company V’s bond after sales are made.

Cost of bonds = Purchased cost of bondsSales made=$10,000$2,000=$8,000 (4)

Calculate the cost of company A’s bond after sales are made.

Cost of bonds = Purchased cost of bondsSales made=$35,000$15,000=$20,000 (5)

Calculate the unrealized gain (or loss).

Unrealized gain (or loss)= Total fair value  Total cost of trading securities=$69,500$68,000=$1,500 (6)

3.

To determine

Prepare the year-end fair value adjustment entry for the trading securities’ portfolio.

3.

Expert Solution
Check Mark

Explanation of Solution

Prepare the year-end fair value adjustment entry for the trading securities’ portfolio as follows:

DateAccount Titles and DescriptionPost Ref.Debit ($)Credit ($)
December 31Fair Value Adjustment-Trading (6) 1,500 
 Unrealized Gain-Income   1,500
 (To record the unrealized gain in fair value of trading securities)   

Table (9)

  • Fair Value Adjustment is a contra-asset account. The account shows a debit balance since the market price has increased (gain). Therefore, debit the fair value adjustment with $1,500.
  • Unrealized Gain–income is an adjustment account to report the investment at fair market value. Since gain has occurred while adjusting. Therefore, credit the unrealized gain–income account with $1,500.

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Chapter 15 Solutions

Principles of Financial Accounting.

Ch. 15 - Prob. 6DQCh. 15 - Prob. 7DQCh. 15 - Prob. 8DQCh. 15 - Prob. 9DQCh. 15 - Prob. 10DQCh. 15 - Prob. 11DQCh. 15 - Prob. 12DQCh. 15 - Refer to Googles statement of comprehensive income...Ch. 15 - Prob. 14DQCh. 15 - Which of the following statements are true of...Ch. 15 - Prob. 2QSCh. 15 - Prob. 3QSCh. 15 - Kitty Company began operations in the current year...Ch. 15 - Refer to the information in QS 15-4. (1) After the...Ch. 15 - Prob. 6QSCh. 15 - Prob. 7QSCh. 15 - Prob. 8QSCh. 15 - Prob. 9QSCh. 15 - Prob. 10QSCh. 15 - Prob. 11QSCh. 15 - Prepare Tiker Companys journal entries to record...Ch. 15 - Prob. 13QSCh. 15 - Prob. 14QSCh. 15 - Prob. 15QSCh. 15 - Prob. 16QSCh. 15 - Prob. 17QSCh. 15 - Prob. 18QSCh. 15 - Debt and equity securities and short- and...Ch. 15 - Prob. 2ECh. 15 - Prepare Natura Co.s journal entries to record the...Ch. 15 - Prob. 4ECh. 15 - On December 31, Lujack Co. held the following...Ch. 15 - Prob. 6ECh. 15 - Prob. 7ECh. 15 - Prob. 8ECh. 15 - Prob. 9ECh. 15 - Prob. 10ECh. 15 - Prob. 11ECh. 15 - Prob. 12ECh. 15 - Prob. 13ECh. 15 - Selected accounts from GermX Co.s adjusted trial...Ch. 15 - Prob. 15ECh. 15 - Use the following information of Prescrip Co. to...Ch. 15 - Prob. 17ECh. 15 - Prob. 1APCh. 15 - Mead Inc. began operations in Year 1. Following is...Ch. 15 - Stoll Co.s long-term available-for-sale portfolio...Ch. 15 - Rose Company had no short-term investments prior...Ch. 15 - Prob. 5APCh. 15 - Prob. 6APCh. 15 - Prob. 1BPCh. 15 - Paris Inc. began operations in Year 1. Following...Ch. 15 - Troys long-term available-for-sale portfolio at...Ch. 15 - Prob. 4BPCh. 15 - Prob. 5BPCh. 15 - Prob. 6BPCh. 15 - Prob. 15SPCh. 15 - Prob. 1AACh. 15 - Prob. 2AACh. 15 - Prob. 3AACh. 15 - Prob. 1BTNCh. 15 - Prob. 2BTNCh. 15 - Prob. 3BTNCh. 15 - Prob. 5BTN
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