Chapter 15, Problem 2BPSB

To determine

Concept Introduction:

Available-for-sale investments:

Available-for-sale investments are the investments which neither fall in the category of trading investments nor fall in the category of held-to-maturity investments.

They are recorded at fair market value. The effects of fluctuations in the prices i.e. increase or decrease in prices at the year-end are adjusted and unrealized gain or loss due to these fluctuations are transferred to other comprehensive income.

Other comprehensive income is not included in net income. Other comprehensive income are shown after net income in the income statement.

Requirement 1

To prepare:

Journal entries to record the preceding transactions and events.

Answer to Problem 2BPSB

Solution:

Date	Accounts Titles and Descriptions	Debit ( in $ )	Credit ( in $ )
2017
Feb. 6	Short term investments -- AFS(Nokia)	143,250
	Cash		143,250
	(To record purchase of AFS securities)
Feb. 15	Short term investments -- AFS(T-bills)	20,000
	Cash		20,000
	(To record purchase of AFS securities)
Apr. 7	Short term investments -- AFS (Dell Co.)	48,655
	Cash		48,655
	(To record purchase of AFS securities)
June 2	Short term investments -- AFS(Merck)	184,140
	Cash		184,140
	(To record purchase of AFS securities)
June 30	Cash	646
	Dividend Revenue		646
	(To record dividend received)
Aug. 11	Cash	38,050
	Realized gain on sale of available securities		2,237
	Short term investments -- AFS(Nokia)		35,813
	(To record sale of Nokia securities)
Aug-16	Cash	20,600
	Short term investments -- AFS(T-bills)		20,000
	Interest revenue		600
Aug. 24	Cash	120
	Dividend revenue		120
	(To record receipt of dividend revenue)
Nov. 9	Cash	510
	Dividend revenue		510
	(To record receipt of dividend revenue)
Dec-31	Cash	180
	Dividend revenue		180
	(To record receipt of dividend revenue)

Explanation of Solution

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

Feb. 6 $–$ The shares are purchased for $ 41.25 per share add commission $ 3,000

The purchase price is calculated as under $–$

$Purchaseprice=\left(\$\text{ 41}\text{.25 }X\text{ 3,400 }shares\right)+\$\text{ 3,000}$

$Purchaseprice=\text{ \$ 143,250}$

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

Feb. 15 $–$ The treasury bills (debt securities) are purchased for $ 20,000. Thus, short-term investment- AFS (T-bills) are debited and cash is credited.

Apr. 7 $–$ The shares are purchased for $ 39.50 per share add commission $ 1,255

The purchase price is calculated as under $–$

$Purchaseprice=\left(\$\text{ 39}\text{.50 }X\text{ 1,200 }shares\right)+\$\text{ 1,255}$

$Purchaseprice=\text{ \$ 48,665}$

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

June 2 $–$ The shares are purchased for $ 72.50 per share add commission $ 2,890

The purchase price is calculated as under $–$

$Purchaseprice=\left(\$\text{ 72}\text{.50 }X\text{ 2,500 }shares\right)+\$\text{ 2,890}$

$Purchaseprice=\text{ \$ 184,140}$

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

June 30 $–$ The dividend is received on Nokia’s Stock. The dividend is calculated as under $–$

$\begin{array}{l}Dividendreceived=NumberofsharesXDividendpershare\\ Dividendreceived=\text{ 3},400sharesX\$0.19pershare\\ Dividendreceived=\$\text{ 6}46\end{array}$

Aug. 11 $–$ the shares of Nokia were sold for $ 46 per share less commission.

The sale amount will be calculated as under $–$

$\text{Selling }price=\left(\$\text{ 46 }X\text{ 850 }shares\right)\text{ - }\$\text{ 1,050}$

$\text{Selling }price=\$38,050$

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

$\begin{array}{l}Gainonsaleofshares=Sellingprice-Purchaseprice\\ Gainonsaleofshares=\$38,050-(\frac{\$143,250}{3,400shares}X850shares)\\ Gainonsaleofshares=\$38,050-\$35,813\\ Gainonsaleofshares=\$2,237\end{array}$

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

Aug. 16 $–$ The T-bills are redeemed on maturity. Thus, the cash received = Principal + Interest.

The total cash is calculated as under $–$

$\begin{array}{l}Totalcashreceived=\$20,000+\frac{\$20,000X6\%X6months}{12months}\\ Totalcashreceived=\$20,000+\$600\\ Totalcashreceived=\$20,600\end{array}$

Thus, cash is debited and T-bills and interest revenue is credited.

Aug. 24 $–$ The dividend is received on Dell Co. Stock. The dividend is calculated as under $–$

$\begin{array}{l}Dividendreceived=NumberofsharesXDividendpershare\\ Dividendreceived=\text{ 1},200sharesX\$0.10pershares\\ Dividendreceived=\$\text{ 12}0.\end{array}$

Nov. 9 $–$ The dividend is received on Nokia’s Stock. The dividend is calculated as under $–$

$\begin{array}{l}Dividendreceived=NumberofsharesXDividendpershare\\ Dividendreceived=\text{ 2},550sharesX\$0.2pershares\\ Dividendreceived=\text{ \$510}\end{array}$

Dec. 18 $–$ The dividend is received on Dell Co. Stock. The dividend is calculated as under $–$

$\begin{array}{l}Dividendreceived=NumberofsharesXDividendpershare\\ Dividendreceived=\text{ 1},200sharesX\$\text{ 0}.15pershares\\ Dividendreceived=\$\text{ 180}\end{array}$

Conclusion

Thus, all the journal entries have been recorded and explained.

To determine

Requirement 2

To prepare:

A table to compare year-end cost and fair values of Slip Systems’ short-term investments in available for sale securities.

Answer to Problem 2BPSB

Solution:

AFS securities	Number of Shares	Cost	Total	Fair Value	Total	Increased or decreased
Nokia	2,550	42.13	107,437	40.25	102,637.5	-4,799.5
Dell Co.	1,200	40.55	48,655	40.50	48,600	-55
Merck	2,500	73.66	184,140	59	147,500	-36,640
					298,737.5	-41,494.5

Explanation of Solution

The table has been prepared. The fair value per share for each stock has been given in the question and the cost has been calculated in the calculations above.

The per unit cost of each share is calculated as under $–$

$\begin{array}{l}Perunit\cos t=\frac{Total\cos t}{Numberofshares}\\ Nokia=\frac{\$107,437}{2,550shares}=\$42.13\\ DellCo.=\frac{\$48,665}{1,200shares}=\$40.55\\ Merck=\frac{\$184,140}{2,500shares}=\$73.66\end{array}$

Conclusion

Thus, all the cost and fair value for all the shares have been compared and it can be concluded that there is an unrealized loss on the AFS securities of $ 4,470.

To determine

Requirement 3

To prepare:

An adjusting entry to record the year-end fair value adjustment for the portfolio of short-term investments.

Answer to Problem 2BPSB

Solution:

Date	Accounts Titles and Descriptions	Debit ( in $ )	Credit ( in $ )
Dec-31	Unrealised Loss	41,494.5
	Available for Sale securities		41,494.5
	(To record unrealized loss on the AFS securities)

Explanation of Solution

The loss has been calculated from the table above $–$

AFS securities	Number of Shares	Cost	Total	Fair Value	Total	Increased or decreased
Nokia	2,550	42.13	107,437	40.25	102,637.5	-4,799.5
Dell Co.	1,200	40.55	48,655	40.50	48,600	-55
Merck	2,500	73.66	184,140	59	147,500	-36,640
					298,737.5	-41,494.5

Conclusion

Thus, the adjusting journal entry has been recorded for the year-end for the available for sale securities.

To determine

Requirement 4

To explain:

Balance sheet presentation of the fair value adjustment for Slip Systems’ short-term investments.

Explanation of Solution

Slip Systems Company
Balance sheet
December 31st, 2017
Assets			Total liabilities and equity
Current Assets			Current Liabilities
Short-term investments - AFS		298,738	----
			Long-term liabilities
Long-term investments			----
			Total Liabilities
			Stockholder's equity
			----
			Accumulated other comprehensive income / Loss	(41,494)	(41,494)

The available-for-sale short-term securities are recorded at the fair value as given by the market under the head current assets in the asset section of the balance sheet. The unrealized loss is recorded in the stockholder’s equity under the head “Accumulated other comprehensive income/loss”.

Conclusion

This is how, the available-for-sale short-term securities are recorded in the balance sheet.

To determine

Requirement 5

To determine:

How short-term investments affects Slip Systems’ (a) income statement for the year 2017 and (b) the equity section of its balance sheet at year-end 2017.

Explanation of Solution

(e) Income statement

The unrealized loss will be recorded in the other comprehensive income section of the income statement after the net income is recorded.

This is how, the income statement is effected with short-term investments of Slip Systems.

(f) The equity section of its balance sheet ate year-end 2017.

The unrealized loss will be added to other comprehensive income account as loss and it is shown under stockholder’s equity section. It will reduced the total amount of total equity by the amount of unrealized loss.

Conclusion

Thus, the effects of short-term investments on affects Slip Systems’ (a) income statement for the year 2017 and (b) the equity section of its balance sheet at year-end 2017 have been discussed.