Chapter 15, Problem 4BP

1.1

To determine

Prepare the journal entries to record the given transactions.

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and equities.

Credit, all increase in liabilities, revenues, and equities, all decrease in assets, and expenses.

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

Date	Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
January 5, 2015	Long-Term Investments - Company B		200,500
	Cash			200,500
	(To record the purchase of Company B’s shares.
August 1, 2015	Cash (1)		21,000
	Long-term investment-Company B			21,000
	(To record the cash dividend received)
December 31, 2015	Long-Term Investments - Company B		20,500
	Earnings from long-term investment (2)			20,500
	(To record the earnings from long-term investment)
August 1, 2016	Cash (3)		27,000
	Long-term investment-Company B			27,000
	(To record the cash dividend received)
December 31, 2016	Long-Term Investments - Company B		19,500
	Earnings from long-term investment (4)			19,500
	(To record the earnings from long-term investment)
January 8, 2017	Cash		375,000
	Gain on sale of investment (6)			192,500
	Long-term investment – Company B (5)			182,500
	(To record sale of investment and gain from sale of investment)

Table (1)

Working note:

Calculate the dividend revenue received from Company B for the year 2015

$\begin{array}{c}\text{Dividends = }\left(\text{Number of shares}\times \text{Dividend per share}\right)\\ =\left(20,000\times \$1.05\text{per}\text{share}\right)\\ =\$21,000\end{array}$ (1)

Calculate the earnings from long-term investment for the year 2015

$\begin{array}{c}\begin{array}{l}\text{Earnings from }\\ \text{long-term investment}\end{array}\}\text{ = Principle}\times \text{Rate}\times \text{Time}\\ \text{=\$82,000}\times \frac{25}{100}\times \frac{12}{12}\\ =\$20,500\end{array}$ (2)

Calculate the dividend revenue received from Company B for the year 2016

$\begin{array}{c}\text{Dividends = }\left(\text{Number of shares}\times \text{Dividend per share}\right)\\ =\left(20,000\times \$1.35\text{per}\text{share}\right)\\ =\$27,000\end{array}$ (3)

Calculate the earnings from long-term investment for the year 2016

$\begin{array}{c}\begin{array}{l}\text{Earnings from }\\ \text{long-term investment}\end{array}\}\text{ = Principle}\times \text{Rate}\times \text{Time}\\ \text{=\$78,000}\times \frac{25}{100}\times \frac{12}{12}\\ =\$19,500\end{array}$ (4)

Calculate the book value of investment

Book value of investment at the year-end 2016
Particulars	$
Original cost	200,500
Less: 2015 dividends	(21,000)
Add: 2015 earnings	20,500
Book value of investment at the year-end 2015	200,000
Less: 2016 dividends	(27,000)
Add:  2016 earnings	19,500
Book value of investment at the yearend 2016	192,500

Table (2) (5)

Calculate the gain (loss) from sale of long-term investment.

$\begin{array}{c}\begin{array}{l}\text{Gain }\left(\text{loss}\right)\\ \text{on investments}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Cash received –}\\ \text{Purchase value}\end{array}\right\}\\ \text{= \$375,000}-\$192,500(5)\\ =\$182,500\end{array}$ (6)

1.2

To determine

Ascertain the carrying (book) value per share of Company Bk’s investments in Company B common stock.

Explanation of Solution

Ascertain the carrying (book) value per share of Company Bk’s investments in Company B common stock as follows:

$\begin{array}{c}\begin{array}{l}\text{Carrying }\\ \text{value of per share}\end{array}\}\text{ =}\frac{\text{Book value of share at the year ended 2017 (5)}}{\text{Number of shares purchased}}\\ \text{= }\frac{\text{\$192,500}}{20,000\text{ shares}}\\ =\$9.63\text{ per share}\end{array}$

Therefore, the carrying value per share at the end of the January 1, 2017 is $9.63.

1.3

To determine

Ascertain the net increase or decrease in Company Bk’s equity from January 5, 2015 through January 2, 2017 resulting from its investment in Company B.

Explanation of Solution

Ascertain the net increase or decrease in Company Bk’s equity from January 5, 2015 through January 2, 2017 resulting from its investment in Company B as follows:

$\begin{array}{c}\text{Net increase = }\left(\begin{array}{l}\text{Earnings from Company B for the year 2017 (2)+}\\ \text{Earnings from Company B for the year}2018\text{(4)}+\\ \text{Gain on sale of investments (6)}\end{array}\right)\\ =\$20,500+\$19,500+\$182,500\\ =\$222,500\end{array}$

Therefore, the net increase in Company B’s equity from January 5, 2015 through January 2, 2017 is $222,500.

2.1

To determine

Prepare the journal entries to record the given transactions.

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and equities.

Credit, all increase in liabilities, revenues, and equities, all decrease in assets, and expenses.

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

Date	Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
January 5, 2015	Long-Term Investments - Company B		200,500
	Cash			200.500
	(To record the purchase of Company B’s shares.
August 1, 2015	Cash (7)		21,000
	Dividend revenue			21,000
	(To record the cash dividend received)
December 31, 2015	Fair value adjustment		37,500
	Unrealized gain – Equity (9)			37,500
	(To record the earnings from long-term investment)
August, 1 2016	Cash (10)		27,000
	Dividend revenue			27,000
	(To record the cash dividend received)
December 31, 2016	Fair value adjustment		35,000
	Unrealized gain – Equity (12)			35,000
	(To record the earnings from long-term investment)
January 2, 2017	Cash		375,000
	Gain on sale of investment (13)			200,500
	Long-term investment – Company B			174,500
	(To record sale of investment and gain from sale of investment)
January 2, 2017	Fair value adjustment		72,500
	Unrealized gain – Equity (14)			72,500
	(To record the earnings from long-term investment)

Table (1)

Working note:

Calculate the dividend revenue received from Company B for the year 2015

$\begin{array}{c}\text{Dividends = }\left(\text{Number of shares}\times \text{Dividend per share}\right)\\ =\left(20,000\times \$1.05\text{per}\text{share}\right)\\ =\$21,000\end{array}$ (7)

Calculate the total fair value of investment at the end of the year 2015

$\begin{array}{c}\text{Total fair value = Number of share}\times \text{Rate per share}\\ \text{=\$20,000}\times \$11.90\\ =\$238,000\end{array}$ (8)

Calculate the value of unrealized gain or loss

$\begin{array}{c}\text{Short-term investment = }\left(\text{Total Fair value }-\text{ Total cost of investment}\right)\\ =\left(\$238,000-\$200,500\right)\\ =\$37,500\end{array}$ (9)

Calculate the dividend revenue received from Company B for the year 2016

$\begin{array}{c}\text{Dividends = }\left(\text{Number of shares}\times \text{Dividend per share}\right)\\ =\left(20,000\times \$1.35\text{per}\text{share}\right)\\ =\$27,000\end{array}$ (10)

Calculate the total fair value of investment at the end of the year 2015

$\begin{array}{c}\text{Total fair value = Number of share}\times \text{Rate per share}\\ \text{=\$20,000}\times \$13.65\\ =\$273,000\end{array}$ (11)

Calculate the value of unrealized gain or loss

$\begin{array}{c}\text{Short-term investment = }\left[\begin{array}{l}\left(\text{Total Fair value }-\text{ Total cost of investment}\right)-\\ \text{Unrealized gain incurred in the year 2017}\end{array}\right]\\ =\left(\$273,000-\$200,500\right)-\$37,500\\ =\$35,000\end{array}$ (12)

Calculate the gain (loss) from sale of long-term investment.

$\begin{array}{c}\begin{array}{l}\text{Gain }\left(\text{loss}\right)\\ \text{on investments}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Cash received –}\\ \text{Purchase value}\end{array}\right\}\\ \text{= \$375,000}-\$200,500\\ =\$174,500\end{array}$ (13)

Calculate the amount of fair value adjustment

$\begin{array}{c}\begin{array}{l}\text{Fair value}\\ \text{ adjustment}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Unrealized gain for the year 2017 +}\\ \text{Unrealized gain for the year 2018}\end{array}\right\}\\ \text{= \$37,500 + }\$35,000\\ =\$72,500\end{array}$ (14)

2.2

To determine

Ascertain the carrying (book) value per share of Company B’s investments in Company B common stock.

Explanation of Solution

Ascertain the carrying (book) value per share of Company B’s investments in Company B common stock as follows:

$\begin{array}{c}\begin{array}{l}\text{Carrying }\\ \text{value of per share}\end{array}\}\text{ =}\frac{\text{Book value of shares}}{\text{Number of shares purchased}}\\ \text{= }\frac{\text{\$200,500}}{20,000\text{ shares}}\\ =\$10.03\text{ per share}\end{array}$

Therefore, the carrying value per share at the end of the January 1, 2017 is $10.03.

2.3

To determine

Ascertain the net increase or decrease in Company B’s equity from January 5, 2015 through January 2, 2017 resulting from its investment in Company B.

Explanation of Solution

Ascertain the net increase or decrease in Company B’s equity from January 5, 2015 through January 2, 2017 resulting from its investment in Company B as follows:

$\begin{array}{c}\text{Net increase = }\left(\begin{array}{l}\text{Dividend revenue for the year 2017 (7)+}\\ \text{Dividend revenue for the year}2018\text{(11)}+\\ \text{Gain on sale of investments (14)}\end{array}\right)\\ =\$21,000+\$27,000+\$174,500\\ =\$222,500\end{array}$

Therefore, the net increase in Company B’s equity from January 5, 2015 through January 2, 2017 is $222,500.