Chapter 15, Problem 4BPSB

Requirement 1

To determine

To prepare:

Journal entries to record the transactions and events given for Brinkley

Answer to Problem 4BPSB

Solution:

Date	Accounts Titles and Descriptions	Debit	Credit
2015
Jan-05	Long term Investment − Bloch’s	200,500
	Cash		200,500
	(To purchase common shares of Bloch’s)
Aug-01	Cash	21,000
	Long term Investment − Bloch’s		21,000
	(To record the receipt of dividends from Bloch.)
Dec-31	Long term Investment − Bloch’s	20,500
	Long Investment Income		20,500
	(To record Bloch’s reported income)
2016
Aug-01	Cash	27,000
	Long term Investment Income		27,000
	(To record the receipt of dividends from Bloch.)
Dec-31	Long term Investment − Bloch’s	19,500
	Long term Investment Income		19,500
	(To record Bloch’s reported income)
2018
Jan-08	Cash	375,000
	Long term Investment − Bloch’s		182,500
	Gain on Sale of Investment		192,500
	(To record sale of Equity Investment − Bloch’s)

Explanation of Solution

The above journal entries can be explained as under −

For the year 2015 −

Jan. 5 − The common shares of Bloch’s have been purchased for $200,500. Thus, Long term Investment − Bloch’s for shares have been debited and cash has been credited for $200,500

Aug.01 − Bloch paid dividends of $1.05 per share. The dividends on Bloch will be calculated as under −

  $\begin{array}{l}Dividends=DividendspaidXShares\text{ in Boch's}\\ Dividends=\$1.05X\text{ 20,000 shares}\\ Dividends=\$21,000\end{array}$

Since, dividends are received, they will be credited or subtracted from the Long term Investment − Bloch’s account.

Dec. 31 − the net income of Bloch is $ 82,000 for the year. The net income will be added to Bloch investment account.

The net income of Bloch will be calculated as under −

  $\begin{array}{l}N\text{et income}=NetIncomeX\text{ S}haresin\text{ Bloch}\\ N\text{et income}=\$82,000X\text{ 25 \%}\\ N\text{et income }=\$20,500\end{array}$

Thus, the net income is added to Long term Investment − Bloch account.

For the year 2016 −

Aug.1 − Bloch paid dividends of $ 1.35 per share. The dividends on Bloch will be calculated as under −

  $\begin{array}{l}Dividends=DividendspaidXShares\text{ in Bloch}\\ Dividends=\$1.35X\text{ 20000 shares}\\ Dividends=\$27,000\end{array}$

Since, dividends are received, they will be credited or subtracted from the Long term Investment − Bloch account.

Dec. 31 − the net income of Bloch is $ 78,000 for the year. The net income will be added to Bloch investment account.

The net income of Bloch will be calculated as under −

  $\begin{array}{l}N\text{et income}=NetIncomeX\text{ S}haresin\text{ Bloch}\\ N\text{et income}=\$78,000X\text{ 25 \%}\\ N\text{et income }=\$19,500\end{array}$

Thus, the net income is added to Long term Investment − Bloch account.

For the year 2017 −

Jan. 08 − the sale of investment for $ 375,000

Given,

• The shares are sold for = $ 375,000
• Carrying value of shares −
• Purchase price of shares = $ 200,500
• Net income for year 2015 = $ 20,500
• Net income for year 2016 = $ 19,50
• Dividend for 2015 = $ 21,000
• Dividend for 2016 = $ 27,000


  $\begin{array}{l}\begin{array}{l}Carryingvalueofinvestment=Purchasepriceofshares+\left(\begin{array}{l}Netincomeforyear2015\\ +Netincomeforyear2016\end{array}\right)\\ –\left(\begin{array}{l}Dividendfor2015\\ +Dividendfor2016\end{array}\right)\end{array}\hfill \\ Carryingvalueofinvestment=\$200,500+\left(\$19,500+\$20,500\right)-\left(\$21,000+\$27,000\right)\hfill \\ Carryingvalueofinvestment=\$192,500\hfill \end{array}$

Now, gain will be calculated as −

  $\begin{array}{l}Gainonsale=Salepriceofinvestment–Carryingvalueofinvestment\hfill \\ Gainonsale=\$375,000-\$192,500\hfill \\ Gainonsale=\$182,500\hfill \end{array}$

The cash will be debited with the sale amount of $ 375,000. The Long term Investment − Bloch will be credited with $ 192,500 and the gain on sale of investment will be credited with $ 182,500.

Conclusion

Thus, all the journal entries have been prepared.

Requirement 2

To determine

To compute:

Carrying (Book) value per share of Brinkley’s Investment in Bloch common stock

Answer to Problem 4BPSB

Solution:

The carrying (Book) value per share of Brinkley’s Investment in Bloch common stock = $9.63 per share.

Explanation of Solution

The above answer can be explained as under −

Given,

• Carrying value of investment = $ 192,500 (explained in requirement 1)
• Number of shares purchased = 20,000 shares


  $\begin{array}{l}Carrying\left(Book\right)valuepershare=\frac{Carryingvalueofinvestment}{Numberofsharespurchased}\hfill \\ Carrying\left(Book\right)valuepershare=\frac{\$192,500}{20,000shares}\hfill \\ Carrying\left(Book\right)valuepershare=\$9.63pershare\hfill \end{array}$

Conclusion

Thus, the carrying (Book) value per share has been calculated.

Requirement 3

To determine

To compute:

Net Increase or decrease in Brinkley’s equity from January 5, 2017 through January 8, 2017

Answer to Problem 4BPSB

Solution:

The net Increase in Brinkley’s equity from January 5, 2017 through January 8, 2017 = $ 222,500

Explanation of Solution

The above answer can be explained as under −

Given,

• Earnings from Bloch − 2015 = $ 20,500
• Earnings from Bloch − 2016 = $ 19,500
• Gain on sale of Investment = $ 182,500


  $\begin{array}{l}Netincrease=\left(\begin{array}{l}EarningsfromBloch–2015\\ +EarningsfromBloch–2016\end{array}\right)+GainonsaleofInvestment\hfill \\ Netincrease=\$20,500+\$19,500+\$182,500\hfill \\ Netincrease=\$222,500\hfill \end{array}$

Conclusion

Thus, the net Increase in Brinkley’s equity from January 5, 2017 through January 8, 2017 has been determined.

Part 2 − Investments as Available for Sale Investments

Requirement 1

To determine

To prepare:

Journal entries to record the transactions and events given for Brinkley.

Answer to Problem 4BPSB

Solution:

Date	Accounts Titles and Descriptions	Debit	Credit
2015
Jan-05	Long term Investment - Bloch (LT)	200,500
	Cash		200,500
	(To record purchase of shares of Bloch)
Aug-01	Cash	21,000
	Dividend revenue		21,000
	(To record receipt of dividend revenue)
Dec-31	Market Adjustment - LT	37,500
	Unrealized Gain - LT equity		37,500
	(To record unrealized loss on the LT securities)
2016
Aug-01	Cash	27,000
	Dividend revenue		27,000
	(To record receipt of dividend revenue)
Dec-31	Market Adjustment - LT	35,000
	Unrealized Gain - LT equity		35,000
	(To record unrealized loss on the LT securities)
2017
Jan-08	Cash	375,000
	Long term Investment - Bloch (LT)		200,500
	Gain on Sale of Investment		174,500
	(To record sale of LT investment)
Jan-08	Unrealized Gain - AFS equity	72,500
	Market Adjustment − AFS		72,500
	(To record unrealized gain transferred to adjustment account)

Explanation of Solution

The above journal entries can be explained as under −

For the year 2015 −

Jan. 05 − The common shares of Bloch have been purchased for $ 200,500. Thus, Long term Investment - Bloch (AFS) has been debited and cash has been credited for $200,500.

Aug.01 −The dividend is received on Bloch’s Stock for $ 1.05 per share. The dividend is calculated as under −

Dividend received = Number of shares X Dividend per share

Dividend received = 20,000 shares X $ 1.05 per share

Dividend received = $ 21,000

Thus, the cash received will be debited and the dividend revenue will be credited.

Dec. 31 −The fair value per share of Bloch is $ 11.90. The total fair value will be calculated as −

Total fair value = Number of shares X Fair value per share

Total fair value = 20,000 shares X $ 11.90

Total fair value = $ 238,000

Cost price of shares = $ 200,500

The gain on fair value of shares will be calculated and adjusted as −

Unrealized gain = Total fair value − Cost price per share

Unrealized gain = $ 238,000 - $ 200,500

Unrealized gain = $ 37,500

The unrealized gain will be credited and Market Adjustment −LT will be debited with $ 37,500.

For the year 2016 −

Aug-01 −The dividend is received on Bloch’s Stock for $ 1.35 per share. The dividend is calculated as under −

Dividend received = Number of shares X Dividend per share

Dividend received = 20,000 shares X $ 1.35per share

Dividend received = $ 27,000

Thus, the cash received will be debited and the dividend revenue will be credited.

Dec. 31 −The fair value per share of Bloch is $ 13.65. The total fair value will be calculated as −

Total fair value = Number of shares X Fair value per share

Total fair value = 20,000 shares X $13.65

Total fair value = $ 273,000

Cost price of shares = $ 200,500

The gain on fair value of shares will be calculated and adjusted as −

Unrealized gain = Total fair value − Cost price per share

Unrealized gain = $ 273,000 - $ 200,500

Unrealized gain = $ 72,500

Amount to be adjusted = Total amount − Amount adjusted in 2015

Amount to be adjusted = $72,500-$37,500

Amount to be adjusted = $35,000

The unrealized gain will be credited and Market Adjustment − LT will be debited with $ 35,000.

For the year 2017 −

Jan. 08 − The shares are sold for $ 375,000. The cost price of the shares was $ 200,500.

Now, gain will be calculated as −

Gain on sale = Sale price of investment − Carrying value of investment

Gain on sale = $ 375,000 - $ 200,500

Gain on sale = $174,500

The cash will be debited with the sale amount of $ 375,000. The Long term Investment - Bloch (LT) will be credited with $ 200,500 and the gain on sale of investment will be credited with $ 174,500.

In the next entry, the unrealized gain is debited with $ 72,500 (i.e. $ 37,500 + $ 35,000) and the Market Adjustment − LT is credited with $ 72,500.

Conclusion

Thus, all the journal entries have been prepared.

Requirement 2

To determine

To compute:

Carrying (Book) value per share of Brinkley’s Investment in Bloch common stock

Answer to Problem 4BPSB

Solution:

The carrying (Book) value per share of Brinkley’s Investment in Bloch common stock = $ 10.03 per share.

Explanation of Solution

The above answer can be explained as under −

Given,

• Carrying value of investment = $ 200,500
• Number of shares purchased = 20,000 shares


  $\begin{array}{l}Carrying\left(Book\right)valuepershare=\frac{Carryingvalueofinvestment}{Numberofsharespurchased}\hfill \\ Carrying\left(Book\right)valuepershare=\frac{\$200,500}{20,000shares}\hfill \\ Carrying\left(Book\right)valuepershare=\$10.03pershare\hfill \end{array}$

Conclusion

Thus, the carrying (Book) value per share has been calculated.

Requirement 3

To determine

To compute:

Net Increase or decrease in Brinkley’s equity from January 5, 2017 through January 8, 2017

Answer to Problem 4BPSB

Solution:

The net Increase in Brinkley’s equity from January 5, 2017 through January 8, 2017 = $ 222,500

Explanation of Solution

The above answer can be explained as under −

Given,

• Earnings from Bloch − 2015 = $ 21,000
• Earnings from Bloch − 2016 = $ 27,000
• Gain on sale of Investment = $ 174,500


  $\begin{array}{l}Netincrease=\left(\begin{array}{l}EarningsfromBloch–2015\\ +EarningsfromBloch–2016\end{array}\right)+GainonsaleofInvestment\hfill \\ Netincrease=\$21,000+\$27,000+\$174,500\hfill \\ Netincrease=\$222,500\hfill \end{array}$

Conclusion

Thus, the net Increase in Brinkley’s equity from January 5, 2017 through January 8, 2017 has been determined.