(1)
Journalize the stock investment transactions in the books of Company Z.
(1)
Explanation of Solution
Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.
Debit and credit rules:
- ■ Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - ■ Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Prepare journal entry for the purchase of 4,800 shares of Company AP, at $26 per share, and a brokerage commission of $192.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
February | 14 | Investments–Company AP Stock | 124,992 | ||
Cash | 124,992 | ||||
(To record purchase of shares for cash) |
Table (1)
- ■ Investments–Company AP Stock is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
- ■ Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Working Notes:
Compute amount of cash paid to purchase Company AP’s stock.
Prepare journal entry for the purchase of 2,300 shares of Company
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
April | 1 | Investments–Company AR Stock | 43,792 | ||
Cash | 43,792 | ||||
(To record purchase of shares for cash) |
Table (2)
- ■ Investments–Company AR Stock is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
- ■ Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Working Notes:
Compute amount of cash paid to purchase Company AR’s stock.
Prepare journal entry for sale of 600 shares of Company AP, at $32, with a brokerage of $100.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
June | 1 | Cash | 19,100 | ||
Gain on Sale of Investments | 3,476 | ||||
Investments–Company AP Stock | 15,624 | ||||
(To record sale of shares) |
Table (3)
- ■ Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- ■ Loss on Sale of Investments is a loss or expense account. Since losses decrease equity, equity value is decreased, and a decrease in equity is debited.
- ■ Investments–Company AP Stock is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.
Working Notes:
Calculate the realized gain (loss) on sale of stock.
Step 1: Compute cash received from sale proceeds.
Step 2: Compute cost of stock investment sold.
Step 3: Compute realized gain (loss) on sale of stock.
Note: Refer to Steps 1 and 2 for value and computation of cash received and cost of stock investment sold.
Prepare journal entry for the dividend received from Company AP for 4,200 shares.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
June | 27 | Cash | 840 | ||
Dividend Revenue | 840 | ||||
(To record receipt of dividend revenue) |
Table (4)
- ■ Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- ■ Dividend Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of dividend received on Company AP’s stock.
Prepare adjusting entry for valuation of trading securities transaction.
Figure(1)
- ■ Valuation Allowance for Trading Investments is a contra-asset account. The account is credited because the market price was increased (gain) to $181,150 from the cost of $153,160.
- ■ Unrealized Gain on Trading Investments is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and increase stockholders’ equity value, and an increase in stockholders’ equity value is debited.
Working Notes:
Compute the unrealized gain (loss) as on December 31.
Step 1: Compute the fair value of the portfolio of the trading investment.
Security | Number of Shares | Fair Market Value | = | Fair Market Value of Investment | |
Company AP | 4,200 shares | $33.00 | = | $138,600 | |
Company AR | 2,300 shares | 18.50 | = | 42,550 | |
Total | $181,150 |
Table (5)
Step 2: Compute the cost per share of Company AP.
Step 3: Compute the cost per share of Company AR.
Step 4: Compute the cost of the portfolio of the trading investment, as on December 31, 2016.
Security | Number of Shares | Cost per Share | = | Cost of Investment | |
Company AP | 4,200 shares | $26.04 | = | $109,368 | |
Company AR | 2,300 shares | 19.04 | = | 43,792 | |
Total | $153,160 |
Table (6)
Note: Refer to Steps 3 and 4 for cost per share of Company AP and Company AR.
Step 5: Compute the unrealized gain (loss) as on December 31, 2016.
Details | Amount ($) |
Trading investments at fair value, December 31 (From Table-5) | $181,150 |
Less: Trading investments at cost, December 31 (From Table-6) | (153,160) |
Unrealized loss on trading investments | $27,990 |
Table (7)
Prepare journal entry for the purchase of 1,200 shares of Company AT, at $65 per share, and a brokerage commission of $120.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
March | 14 | Investments–Company AT Stock | 78,120 | ||
Cash | 78,120 | ||||
(To record purchase of shares for cash) |
Table (8)
- ■ Investments–Company AT Stock is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
- ■ Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Working Notes:
Compute amount of cash paid to purchase Company AT’s stock.
Prepare journal entry for the dividend received from Company AP for 4,200 shares.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
June | 26 | Cash | 882 | ||
Dividend Revenue | 882 | ||||
(To record receipt of dividend revenue) |
Table (9)
- ■ Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- ■ Dividend Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of dividend received on Company AP’s stock.
Prepare journal entry for sale of 480 shares of Company AT at $60, with a brokerage of $50.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
July | 30 | Cash | 28,750 | ||
Loss on Sale of Investments | 2,498 | ||||
Investments–Company AT Stock | 31,248 | ||||
(To record sale of shares) |
Table (10)
- ■ Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- ■ Loss on Sale of Investments is an expense account. Since expenses and losses decrease equity, equity value is decreased, and a decrease in equity is debited.
- ■ Investments–Company AT Stock is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.
Working Notes:
Calculate the realized gain (loss) on sale of stock.
Step 1: Compute cash received from sale proceeds.
Step 2: Compute cost of stock investment sold.
Step 3: Compute realized gain (loss) on sale of stock.
Note: Refer to Steps 1 and 2 for value and computation of cash received and cost of stock investment sold.
Prepare adjusting entry for valuation of trading securities transaction.
Figure (2)
- ■ Unrealized Loss on Trading Investments is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, and a decrease in stockholders’ equity value is debited.
- ■ Valuation Allowance for Trading Investments is a contra-asset account. The account is credited because the market price was decreased (loss).
Working Notes:
Compute the unrealized gain (loss) as on December 31, 2017.
Details | Amount ($) |
Unrealized loss as on December 31, 2017 | $12,032 |
Add: Unrealized gain as on December 31, 2016 (From Table-7) | 27,990 |
Unrealized loss on trading investments | $40,022 |
Table (11)
(2)
Indicate the presentation of trading investments on the current assets section of the
(2)
Explanation of Solution
Balance sheet presentation:
Company Z | ||
Balance Sheet (Partial) | ||
December 31, 2017 | ||
Assets | ||
Current assets: | ||
Trading investments (at cost) | $200,032 | |
Less valuation allowance for trading investments | (12,032) | |
Trading investments (at fair value) | $188,000 |
Table (12)
(3)
Discuss the reporting of trading investments on the financial statements.
(3)
Explanation of Solution
Unrealized gain or loss is the result of change in trading investments cost and fair values, and reported as Other Revenues (Losses) on the income statement. The unrealized gain will be added to the net income and unrealized loss will be deducted from the net income. In 2016, Company Z would report $27,990 of unrealized gain as Other Income on the income statement. In the 2017, Company Z would report $40,022 of unrealized loss as Other Losses on the income statement.
Want to see more full solutions like this?
Chapter 15 Solutions
Financial Accounting
- Rios Co. is a regional insurance company that began operations on January 1, 2012. The following selected transactions relate to investments acquired by Rios Co., which has a fiscal year ending on December 31: Record these transactions on page 10: 20Y2 Feb. May July 1 Purchased 7,400 shares of Caldwell Inc. common stock at $38 per share plus a brokerage commission of $740. Caldwell has 100,000 shares of common stock outstanding. 1 Purchased securities of Holland Inc. as a trading investment for $93,687. 1 Sold 3,850 shares of Caldwell Inc. for $36 per share less a $105 brokerage commission. 31 Received an annual dividend of $0.25 per share on 3,550 shares of Caldwell Inc. stock. Nov. 15 Sold the remaining shares of Caldwell Inc. for $39 per share less a $85 brokerage commission. Dec. 31 The trading securities of Holland Inc. have a fair value on December 31 of $84,345. Record these transactions on page 11: 20Y3 Apr. 1 Purchased securities of Fuller Inc. as a trading investment for…arrow_forwardZeus Investments Inc. is a regional freight company that began operations on January 1, 20Y8. The following transactions relate to trading securities acquired by Zeus Inc., which has a fiscal year ending on December 31: 20Y8 Feb. 14. Purchased 1,800 shares of Apollo Inc. common stock at $27 per share plus a brokerage commission of $360. Apollo Inc. has 78,960 shares of common stock outstanding. Apr. 1. Purchased securities of Ares Inc. as a trading investment for $10,080. June 1. Sold 400 shares of Apollo Inc. for $28 per share less a $50 brokerage commission. June 27. Received an annual dividend of $0.12 per share on 1,400 shares of Apollo Inc. stock. Oct. 15. Sold the remaining shares of Apollo Inc. for $26 per share less a $21 brokerage commission. Dec. 31. The trading securities of Ares Inc. have a fair value on December 31 of $13,080. 20Y9 Mar. 14. Purchased securities of Athena Inc. as a trading investment for $25,720. July 30. Sold securities of Athena Inc.…arrow_forwardOn April 1, 2024, Sheridan Company purchased 34,400 common shares in Ecotown Ltd. for $18 per share. Management has designated the investment as FVTOCI. On December 5, Ecotown paid dividends of $0.10 per share and its shares were trading at $20 per share on December 31. Prepare the required entries to record the purchase, dividends, and year-end adjusting journal entry (if any) for this investment. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry for the account titles and enter O for the amounts. Record journal entries in the order presented in the problem. List all debit entries before credit entries) Date 10 Account Titles Debit Creditarrow_forward
- Zeus Investments Inc. is a regional freight company that began operations on January 1, 20Y8. The following transactions relate to trading securities acquired by Zeus Inc., which has a fiscal year ending on December 31: 20Y8 Feb. 14. Purchased 3,400 shares of Apollo Inc. common stock at $44 per share plus a brokerage commission of $680. Apollo Inc. has 180,280 shares of common stock outstanding. Apr. 1. Purchased securities of Ares Inc. as a trading investment for $29,120. June 1. Sold 800 shares of Apollo Inc. for $45 per share less a $100 brokerage commission. June 27. Received an annual dividend of $0.14 per share on 2,600 shares of Apollo Inc. stock. Oct. 15. Sold the remaining shares of Apollo Inc. for $43 per share less a $28 brokerage commission. Dec. 31. The trading securities of Ares Inc. have a fair value on December 31 of $33,120. 20Y9 Mar. 14. Purchased securities of Athena Inc. as a trading investment for $76,725. July 30. Sold securities of Athena…arrow_forwardOn April 1, 2024, Sunland Company purchased 44,800 common shares in Ecotown Ltd. for $13 per share. Management has designated the investment as FVTOCI. On December 5, Ecotown paid dividends of $0.10 per share and its shares were trading at $15 per share on December 31. Prepare the required entries to record the purchase, dividends, and year-end adjusting journal entry (if any) for this investment. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. Record journal entries in the order presented in the problem. List all debit entries before credit entries.) Date Account Titles く Debit Creditarrow_forwardFlounder Corp. has the following portfolio of securities acquired for trading purposes and accounted for using the FV-NI model at September 30, 2023, the end of the company's third quarter: Investment Cost Fair Value 47,500 common shares of Yuen Inc. $266,000 $190,000 3,200 preferred shares of Monty Ltd. 121,600 128,000 1,350 common shares of Oakwood Inc. 121,500 120,825 On October 8, 2023, the Yuen shares were sold for $5.60 per share. On November 16, 2023, 3,000 common shares of Patriot Corp. were purchased at $43.80 per share. Flounder pays a 1% commission on purchases and sales of all securities. At the end of the fourth quarter, on December 31, 2023, the fair values of the shares held were as follows: Monty $102,050; Patriot $116,750; and Oakwood $137,025. Flounder prepares financial statements every quarter. (a) Your answer is partially correct. Prepare the journal entries to record the sale, purchase, and adjusting entries related to the portfolio for the fourth quarter of 2023.…arrow_forward
- On April 1, 2024, Sandhill Company purchased 46,400 common shares in Ecotown Ltd. for $13 per share. Management has designated the investment as FVTOCI. On December 5, Ecotown paid dividends of $0.10 per share and its shares were trading at $15 per share on December 31. Prepare the required entries to record the purchase, dividends, and year-end adjusting journal entry (if any) for this investment. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts. Record journal entries in the order presented in the problem. List all debit entries before credit entries.) Date Save for Later Account Titles Debit Credit Attempts: 0 of 1 used Submit Answerarrow_forwardDiversified Services, Inc., offers a variety of business services, including financial services through its escrow division. Diversified's fiscal year ends on December 31. The only securities held by Diversified at December 1 were 12 million common shares of Shelby Laminations, Inc., purchased in November for $50 million and classified as available-for-sale. Diversified entered into the following investment activities during the last month of 2013 and the first week of 2014: 2013 Dec. 1 Dec. 9 Dec.29 Dec.30 Dec.31 Purchased $30 million of 12% bonds of Vince-Gill Amusement Corporation and $24 million of 10% bonds of Eastern Waste Disposal Corporation, both at face value and both to be held until they mature. Interest on each bond issued is payable semiannually on November 30 and May 31. Sold on-half of the Shelby Laminations common shares for $26 million. Received cash dividends of $1.5 million from the Shelby Laminations common shares. Purchased UPS's common shares for $5.8 million as…arrow_forwardplease help mearrow_forward
- The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2024. The company buys debt securities, intending to profit from short-term differences in price and maintaining them in an active trading portfolio. Ornamental's fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2023. March 31 Acquired 8% Distribution Transformers Corporation bonds costing $520,000 at face value. September 1 Acquired $1,260,000 of American Instruments' 10% bonds at face value. September 30 Received semiannual interest payment on the Distribution Transformers bonds. October 2 Sold the Distribution Transformers bonds for $550,000. November 1 Purchased $2,000,000 of M&D Corporation 6% bonds at face value. December 31 Recorded any necessary adjusting entry(s) relating to the investments. The market prices of the investments are American Instruments bonds M&D Corporation bonds (Hint: Interest must be accrued.) Required: 1.…arrow_forwardThe following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2024. The company buys debt securities, intending to profit from short- term differences in price and maintaining them in an active trading portfolio. Ornamental's fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2023. March 31 Acquired 8% Distribution Transformers Corporation bonds costing S 430,000 at face value. September 1 Acquired $990, 000 of American Instruments' 10% bonds at face value. September 30 Received semiannual interest payment on the Distribution Transformers bonds. October 2 Sold the Distribution Transformers bonds for $470,000. November 1 Purchased $1,550, 000 of M&D Corporation 6% bonds at face value. December 31 Recorded any necessary adjusting entry(s) relating to the investments. The market prices of the investments are American Instruments bonds S 943, 000 M&D Corporation bonds S 1,613,000 (Hint: Interest…arrow_forwardOn February 18, 2016, Union Corporation purchased 10,000 shares of IBM common stock as a long-term investment at $60 per share. On December 31, 2016, and December 31, 2017, the market value of IBM stock is $58 and $61 per share, respectively. Required: 1. What is the appropriate reporting category for this investment? Why? 2. Prepare the adjusting entry for December 31, 2016. 3. Prepare the adjusting entry for December 31, 2017.arrow_forward
- Financial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage Learning