Chapter 15, Problem 1BPSB

To determine

Concept Introduction:

Trading securities are the investments made in the securities with the intent to sell them in short-term.

The Fair-Value adjustments are recorded at the year-end to record the deviations from the price at which securities have been purchased. If the fair value of the shares at the year-end are more than the price at which shares are purchased, the unrealized gain will be recorded, if it less than unrealized loss is recorded and fair value adjustment accounts are created.

To prepare:

Journal entries for Harris Company for the years 2017, 2018 and 2019.

Answer to Problem 1BPSB

Solution:

The journal entries for Harris Company for the years 2017, 2018 and 2019 are $–$

For the year 2017 $–$

Date	Accounts Titles and Descriptions	Debit ( in $ )	Credit ( in $ )
2017
Mar. 10	Short-term investment $–$ AOL	143,505
	Cash		143,505
	(To record purchase of equity shares of AOL )
May 7	Short-term investment $–$ MTV	184,105
	Cash		184,105
	(To record purchase of equity shares of MTV )
Sep. 1	Short-term investment - UPS	69,950
	Cash		69,950
	(To record purchase of equity shares of UPS )
Dec-31	Unrealised Loss	17,560
	Fair Value adjustment - trading		17,560
	To adjust the trading securities amount to $ 380,000)

Explanation of Solution

The above journal entries can be explained as under $–$

In the transaction on Mar. 10, the shares of AOL Co. were purchased for $ 59.15 per share add commission.

The purchase price will be calculated as $–$

$Purchaseprice=\left(\$\text{ 59}\text{.15 }X\text{ 2,4}00shares\right)+\$\text{ 1,545}$

$Purchaseprice=\text{ \$ 143,505}$

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited.

In the transaction on May 7, the shares of MTV were purchased for $ 36.25 per share add commission $ 2,855

The purchase price will be calculated as $–$

$Purchaseprice=\left(\$36.25X\text{ 5,0}00shares\right)+\$\text{ 2,855}$

$Purchaseprice=\text{ \$ 184,105}$

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited.

In the transaction on Sep. 1, the shares of Z-UPS were purchased for $ 57.25 per share add commission $ 1,250

The purchase price will be calculated as $–$

$Purchaseprice=\left(\$\text{ 57}\text{.25 }X1,200shares\right)+\$\text{ 1,250}$

$Purchaseprice=\text{ \$ 69,950}$

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited.

In the transaction on Dec. 31, the prices of the shares purchased need to be adjusted to a Fair value of $ 380,000. The amount of gain or loss on the shares will be calculated as under

$Unrealisedgainor\left(loss\right)=Fairvalue–TotalCostoftheshares$

$\begin{array}{l}Unrealisedgainor\left(loss\right)=\text{ \$ 380,000 }–\text{ ( \$143,505+\$184,105+\$) 69,950}\\ Unrealisedgainor\left(loss\right)=-\$17,560\end{array}$

Since, there is unrealised loss, we will credit the Fair value adjustment account and debit unrealised loss.

For the year 2018 $–$

Date	Accounts Titles and Descriptions	Debit ( in $ )	Credit ( in $ )
2018
Apr-26	Cash	170,450
	Loss on sale of Short term investment	13,655
	Short term investment $–$ MTV		184,105
	(To record sale of securities of MTV)
Apr. 27	Cash	70,812
	Short-term investment $–$ UPS		862
	Gain on short term investment		69,950
	(To record sale of UPS securities)
June 2	Short-term investment $–$ SPW	622,450
	Cash		622,450
	(To record purchase of equity shares of SPW )
June 14	Short-term investment $–$ Wal-Mart	46,307
	Cash		46,307
	(To record purchase of equity shares of Wal-Mart)
Dec-31	Fair Value adjustment $–$ trading	33,398
	Unrealised Gain		33,298
	To adjust the trading securities amount to $ 828,000)

Explanation:

The above journal entries can be explained as under $–$

In the transaction on Apr. 26, the shares of MTV Company were sold for $ 34.50 per share less commission.

The sale amount will be calculated as under $–$

$\text{Selling }price=\left(\$\text{ 34}\text{.50 }X\text{ 5000 }shares\right)\text{ - }\$\text{ 2,050}$

$\text{Selling }price=\$170,450$

Now, the gain or loss will be calculated as under $–$

$\begin{array}{l}Lossonsaleofshares=Sellingprice-Purchaseprice\\ Lossonsaleofshares=\$170,450-\$184,105\\ Lossonsaleofshares=\$13,665\end{array}$

Cash and loss on sale has been debited as the cash has been received and shares of Hunt Company are credited.

In the transaction on Apr. 27, the shares of UPS Company were sold for $ 60.50 per share less commission.

The sale amount will be calculated as under $–$

$\text{Selling }price=\left(\$\text{ 60}\text{.50 }X\text{ 1,200 }shares\right)\text{ - }\$\text{ 1,788}$

$\text{Selling }price=\$70,812$

Now, the gain will be calculated as under $–$

$\begin{array}{l}Gainonsaleofshares=Sellingprice-Purchaseprice\\ Gainonsaleofshares=\$70,812-\$69,950\\ Gainonsaleofshares=\$862\end{array}$

Cash has been debited as the cash has been received and gain on sale and shares of UPS Company are credited.

In the transaction on June 2, the shares of SPW were purchased for $ 172 per share add commission $ 3,250.

The purchase price will be calculated as $–$

$Purchaseprice=\left(\$\text{ 172 }X\text{ 3,600 }shares\right)+\$\text{ 3,250}$

$Purchaseprice=\text{ \$ 622,450}$

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited.

In the transaction on June 14, the shares of Wal-Mart were purchased for $ 50.25 per share add commission $ 1,082

The purchase price will be calculated as $–$

$Purchaseprice=\left(\$\text{ 50}\text{.25 }X\text{ 900 }shares\right)+\$1,082$

$Purchaseprice=\$46,307$

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited

In the transaction on Dec. 31, the prices of the shares purchased need to be adjusted to a Fair value of $ 828,000. The amount of gain or loss on the shares will be calculated as under

$Unrealisedgainor\left(loss\right)=Fairvalue–TotalCostoftheshares$

$\begin{array}{l}Unrealisedgainor\left(loss\right)=\text{ \$ 828,000 }–\text{ ( 380,000-184,106-69,950+622,450+46,307)}\\ Unrealisedgainor\left(loss\right)=\$33,298\end{array}$

Since, there is unrealised gain, we will debit the Fair value adjustment account and credit unrealised gain

Note: The fair value adjustment of $ 17,560 is also considered since we had adjusted the prices of the shares of the last year as per the prevailing current prices of that time.

For the year 2019 $–$

Date	Accounts Titles and Descriptions	Debit ( in $ )	Credit ( in $ )
2019
Jan. 28	Short-term investment $–$ PepsiCo	88,890
	Cash		88,890
	(To record purchase of equity shares of PepsiCo )
Jan. 31	Cash	602,760
	Loss on sale of Short term investment	19,690
	Short term investment $–$ SPW		622,450
	(To record sale of securities of SPW)
Aug. 22	Cash	133,720
	Loss on sale of Short term investment	9,785
	Short term investment - AOL		143,505
	(To record sale of securities of AOL)
Sep. 03	Short term investment - Vodaphone	62,430
	Cash		62,430
	(To record purchase of equity shares of Vodaphone)
Oct. 09	Cash	47,155
	Gain on sale of Short term investment		848
	Short term investment $–$ Wal-Mart		46,307
	(To record sale of securities of Wal-Mart)
Dec-31	Unrealised Loss	27,048
	Fair value adjustment - Trading		27,048
	To adjust the trading securities amount to $ 140,000)

Explanation:

The above journal entries can be explained as under $–$

In the transaction on Jan. 28, the shares of PepsiCo were purchased for $ 43 per share add commission $ 2,890.

The purchase price will be calculated as $–$

$Purchaseprice=\left(\$\text{ 43 }X\text{ 2,000 }shares\right)+\$\text{ 2,890}$

$Purchaseprice=\text{ \$ 88,890}$

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited.

In the transaction on Jan. 31, the shares of SPW Company were sold for $ 168 per share less commission.

The sale amount will be calculated as under $–$

$\text{Selling }price=\left(\$168X\text{ 3,600 }shares\right)\text{ - }\$\text{ 2,040}$

$\text{Selling }price=\$602,760$

Now, the loss will be calculated as under $–$

$\begin{array}{l}Lossonsaleofshares=Sellingprice-Purchaseprice\\ Lossonsaleofshares=\$602,760-\$622,450\\ Lossonsaleofshares=-\$19,690\end{array}$

Cash and loss on sale has been debited as the cash has been received and shares of SPW Company are credited.

In the transaction on Aug. 22, the shares of AOL Company were sold for $ 56.75 per share less commission.

The sale amount will be calculated as under $–$

$\text{Selling }price=\left(\$56.75X\text{ 2,400 }shares\right)\text{ - }\$\text{ 2,480}$

$\text{Selling }price=\$133,720$

Now, the loss will be calculated as under $–$

$\begin{array}{l}Lossonsaleofshares=Sellingprice-Purchaseprice\\ Lossonsaleofshares=\$133,720-\$143,505\\ Lossonsaleofshares=-\$9,785\end{array}$

Cash and loss on sale has been debited as the cash has been received and shares of AOL Company are credited.

In the transaction on Sep 3, the shares of Vodaphone were purchased for $ 40.50 per share add commission $ 1,680

The purchase price will be calculated as $–$

$Purchaseprice=\left(\$\text{ 40}\text{.50 }X\text{ 1,500 }shares\right)+\$\text{ 1,680}$

$Purchaseprice=\text{ \$ 62,430}$

The shares have been purchased, thus they have been debited and they are purchased for cash thus, cash has been credited.

In the transaction on Oct. 9, the shares of Wal-Mart were sold for $ 53.75 per share less commission.

The sale amount will be calculated as under $–$

$\text{Selling }price=\left(\$53.75X\text{ 900 }shares\right)\text{ - }\$1,220$

$\text{Selling }price=\$47,155$

Now, the loss will be calculated as under $–$

$\begin{array}{l}Gainonsaleofshares=Sellingprice-Purchaseprice\\ Gainonsaleofshares=\$47,155-\$46,307\\ Gainonsaleofshares=\$848\end{array}$

In the transaction on Dec. 31, the prices of the shares purchased need to be adjusted to a Fair value of $ 140,000. The amount of gain or loss on the shares will be calculated as under

$Unrealisedgainor\left(loss\right)=Fairvalue–TotalCostoftheshares$

$\begin{array}{l}Unrealisedgainor\left(loss\right)=\text{ \$ 140,000 }–\text{ ( \$ 828,000-\$ 622,450-143,505+\$62,430-46,307+88,890)}\\ Unrealisedgainor\left(loss\right)=-\$27,058\end{array}$

Since, there is unrealised loss, we will credit the Fair value adjustment account and debit unrealised loss.

Note: The fair value adjustment of $ 33,398 is also considered since we had adjusted the prices of the shares of the last year as per the prevailing current prices of that time.

Conclusion

Thus, all the journal entries for all the three years have been prepared.