a.
Indicate the presentation of marketable securities and the unrealized holding gain or loss in the
a.
Explanation of Solution
Marketable securities: The financial instruments that are traded in less than a year, on the public stock or bond exchanges, are referred to as short-term marketable securities., and those that are traded beyond a year are referred to as long-term marketable securities.
Unrealized holding gains and losses: These are gains and losses which are unrealized and are the result of changes in cost and fair values of the investment for the period the investment is held. Net Unrealized Losses is an adjustment account used to report unrealized loss on adjusting cost of investment at fair market value.
Presentation of marketable securities and the unrealized holding gain or loss:
Corporation CH | |
Balance Sheet (Partial) | |
December 31, Year 1 | |
Current assets: | |
Marketable securities (cost, $388,000) | $416,000 |
Unrealized holding gain on investments | $28,000 |
Table (1)
Working Notes:
Determine the unrealized gain or loss on investment on December 31, Year 1.
Unrealized holding gain or (loss)}= {Fair value of investment on December 31, Year 1– Cost of iinvestment on December 31, Year 1}=$416,000–$388,000=$28,000
b.
Journalize the transactions on April 10 and August 7.
b.
Explanation of Solution
Journalize the sale of marketable securities transaction on April 10.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
April | 10 | Cash | 57,900 | |||
Marketable Securities | 44,000 | |||||
Gain on Sale of Investment | 13,900 | |||||
(Record the disposal of marketable securities) |
Table (2)
Description:
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Marketable Securities is an asset account. Since investment is sold, asset value decreased, and a decrease in asset is credited.
- Gain on Sale of Investment is a revenue account. Since gains and revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Calculate the realized gain (loss) on sale of stock.
Step 1: Compute cash received from sale proceeds.
Cash received = {(Number of shares sold× Sale price per share)– (1)
Step 2: Compute cost of stock investment sold.
Step 3: Compute realized gain (loss) on sale of stock.
Note: Refer to Equations (1) and (2) for value and computation of cash received and cost of stock investment sold.
Journalize the sale of marketable securities transaction on August 7.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
August | 7 | Cash | 73,850 | |||
Loss on Sale of Investment | 10,150 | |||||
Marketable Securities | 84,000 | |||||
(Record the disposal of marketable securities) |
Table (3)
Description:
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Loss on Sale of Investment is a loss or expense account. Since losses and expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
- Marketable Securities is an asset account. Since investment is sold, asset value decreased, and a decrease in asset is credited.
Working Notes:
Calculate the realized gain (loss) on sale of stock.
Step 1: Compute cash received from sale proceeds.
Step 2: Compute cost of stock investment sold.
Step 3: Compute realized gain (loss) on sale of stock.
Note: Refer to Equation (3) and (4) for value and computation of cash received and cost of stock investment sold.
c.
Compute the unadjusted balance in the Marketable Securities control account and Unrealized Holding gain or Loss on Investments.
c.
Explanation of Solution
Compute the unadjusted balance in the Marketable Securities control account on December 31, Year 2.
Details | Amount ($) | Amount ($) |
Balance of marketable securities, December 31, Year 1 | $416,000 | |
Less: Securities of Incorporation LB sold | $44,000 | |
Less: Securities of Incorporation G sold | 84,000 | 128,000 |
Balance of marketable securities, December 31, Year 2 | $288,000 |
Table (4)
Note: Refer to Equations (2) and (4) for the values of securities sold.
Compute the unadjusted balance of Unrealized Holding Gain (Loss) on Investment account as on December 31, Year 2.
Details | Amount ($) |
Fair value of marketable securities, December 31, Year 1 | $416,000 |
Less: Cost of marketable securities, December 31, Year 1 | (388,000) |
Unrealized Holding Gain (Loss) account balance | $28,000 |
Table (5)
d.
Prepare a schedule of cost and market values of marketable securities at December 31, Year 2.
d.
Explanation of Solution
Schedule of cost and market values (as given in the illustration):
Details | Cost | Current Market Value |
Incorporation LB (4,000 shares: cost $44 per share; market value, $67) | $176,000 | $268,000 |
Incorporation G (2,000 shares: cost $42 per share; market value, $37) | 84,000 | 74,000 |
$260,000 | $342,000 |
Table (6)
Note: Out of 5,000 shares of Incorporation LB, 1,000 shares were sold on April 10, so the remaining balance of shares is 4,000 shares. Out of 4,000 shares of Incorporation G, 2,000 shares were sold on August 7, so the remaining balance of shares is 2,000 shares.
e.
Journalize the
e.
Explanation of Solution
Prepare
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
Year 2 | ||||||
December | 31 | Marketable Securities | 54,000 | |||
Unrealized Holding Gain on Investments | 54,000 | |||||
(Record the adjustment of cost of investment to the fair value) |
Table (7)
Description:
- Marketable Securities is an asset account. The account is debited because the market price was increased, and eventually the asset value increased.
- Unrealized Holding Gain on 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 gains increase stockholders’ equity value, an increase in stockholders’ equity value is credited.
Working Notes:
Determine the unrealized gain or loss on investment on December 31, Year 2.
Note: Refer to Table (4) and Table (6) for the both the values.
f.
Indicate the presentation of marketable securities and the unrealized holding gain or loss in the balance sheet of Corporation CH as at December 31, Year 2.
f.
Explanation of Solution
Presentation of marketable securities and the unrealized holding gain or loss:
Corporation CH | |
Balance Sheet (Partial) | |
December 31, Year 2 | |
Current assets: | |
Marketable securities (cost, $260,000) | $342,000 |
Stockholders’ equity: | |
Unrealized holding gain on investments | $82,000 |
Table (8)
Working Notes:
Determine the unrealized gain or loss on investment on December 31, Year 2.
Note: Refer to Table (6) for the value and computation of both the values.
g.
Indicate the presentation of net realized gains or losses in the income statement of Corporation CH for the year ended December 31, Year 2.
g.
Explanation of Solution
Presentation of net realized gain or loss:
Corporation CH | |
Income Statement (Partial) | |
For the Year Ended December 31, Year 2 | |
Non-operating items: | |
Gain on sale of investments | $3,750 |
Table (9)
Working Notes:
Compute net realized gain or loss on investments.
Note: Refer to Part (b) for value and computation of both the values.
h.
Describe the effect of realized and unrealized gains and losses on the income tax return at the end of Year 2.
h.
Explanation of Solution
Effect of realized gains and losses on the income tax return: The realized gains and losses would be included in the income tax return. The realized gains increase the taxable income and income tax liability (income tax payable), while the realized losses decrease the taxable income.
Effect of unrealized gains and losses on the income tax return: The unrealized gains and losses would not be included in the income tax return because those are not recognized.
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Financial Accounting
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