Chapter A, Problem 2AP

1.

To determine

Prepare journal entry for interest received on December 31, 2019.

Explanation of Solution

Prepare journal entry for interest received on December 31, 2019.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2019
December	31	Cash			1,700
			Interest Revenue			1,700
		(To record receipt of interest)

Working Note:

Compute amount of interest revenue.

$\begin{array}{c}\text{Interest revenue}=\$170,000\times 0.04\times \frac{3}{12}\\ =\$1,700\end{array}$

2.

To determine

Journalize the entries related to investment in trading securities.

Explanation of Solution

Trading securities (TS): The category of passive investments which are bought with a purpose to sell in the near future are referred to as trading securities.  The percentage of passive investments in debt or equity will be less than 20%.

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

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 purchase of investment in TS.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2019
October	1	Investments in TS			170,000
			Cash			170,000
		(To record purchase of investment in TS)

Prepare journal entry for adjusting the cost of TS securities to the fair market value, as on December 31, 2019.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2019
December	31	Investments in TS			3,000
			Net Unrealized Gains (Losses)			3,000
		(To record the adjustment of cost of investment in TS to the fair value)

Working note:

Determine the unrealized gain or loss on investment on December 31, 2019.

$\begin{array}{c}\begin{array}{l}\text{Unrealized }\\ \text{gain or }\left(\text{loss}\right)\end{array}\}\text{= }\left\{\begin{array}{l}\text{Fair value of investment on December 31, 2019 – }\\ \text{Book value before adjustment}\end{array}\right\}\\ \text{=\$173,000–\$170,000}\\ \text{=\$3,000}\end{array}$

Prepare journal entry for adjusting the TS to the fair market value, as on December 31, 2020.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2020
December	31	Net Unrealized Gains (Losses)			5,000
			Investments in TS			5,000
		(To record the adjustment of investment in TS to the fair value)

Working note:

Determine the unrealized gain or loss on investment on December 31, 2020.

$\begin{array}{c}\begin{array}{l}\text{Unrealized }\\ \text{gain or }\left(\text{loss}\right)\end{array}\}\text{= }\left\{\begin{array}{l}\text{Fair value of investment on December 31, 2020 – }\\ \text{Book value before adjustment}\end{array}\right\}\\ \text{=\$168,000–\$173,000}\\ \text{=–\$5,000}\end{array}$

Prepare journal entry for adjusting the TS to the fair market value, as on December 31, 2021.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2021
December	31	Net Unrealized Gains (Losses)			28,000
			Investments in TS			28,000
		(To record the adjustment of investment in TS to the fair value)

Working note:

Determine the unrealized gain or loss on investment on December 31, 2021.

$\begin{array}{c}\begin{array}{l}\text{Unrealized }\\ \text{gain or }\left(\text{loss}\right)\end{array}\}\text{= }\left\{\begin{array}{l}\text{Fair value of investment on December 31, 2021 – }\\ \text{Book value before adjustment}\end{array}\right\}\\ \text{=\$165,000–\$168,000}\\ \text{=–\$3,000}\end{array}$

Prepare journal entry to record the sale of investment in TS securities.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2022
March	17	Cash			164,000
		Net Unrealized Gains (Losses)			1,000
			Investments in TS Securities			165,000
		(To record the disposal of trading  investment)

Working note:

Determine the unrealized gain or loss on investment on March 17, 2022.

$\begin{array}{c}\begin{array}{l}\text{Unrealized }\\ \text{gain or }\left(\text{loss}\right)\end{array}\}\text{= }\left\{\begin{array}{l}\text{Fair value of investment on March 17, 2022 – }\\ \text{Book value before adjustment}\end{array}\right\}\\ \text{=\$164,000–\$165,000}\\ \text{=–\$1,000}\end{array}$

2.

To determine

Journalize the entries related to investment in available-for-sale securities.

Explanation of Solution

Available-for-sale (AFS) securities: The category of passive investments which are held as idle funds to serve the future operating and strategic purposes, are referred to as available-for-sale securities. The percentage of passive investments in debt or equity will be less than 20%.

Prepare journal entry for purchase of investment in AFS securities.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2019
December	31	Investments in AFS Securities			170,000
			Cash			170,000
		(To record purchase of investment in AFS securities)

Prepare journal entry for adjusting the cost of AFS securities to the fair market value, as on December 31, 2019.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2019
December	31	Investments in AFS Securities			3,000
			Net Unrealized Gains (Losses)			3,000
		(To record the adjustment of cost of investment in AFS securities to the fair value)

Working note:

Determine the unrealized gain or loss on investment on December 31, 2019.

$\begin{array}{c}\begin{array}{l}\text{Unrealized }\\ \text{gain or }\left(\text{loss}\right)\end{array}\}\text{= }\left\{\begin{array}{l}\text{Fair value of investment on December 31, 2019 – }\\ \text{Book value before adjustment}\end{array}\right\}\\ \text{=\$173,000–\$170,000}\\ \text{=\$3,000}\end{array}$

Prepare journal entry for adjusting the AFS securities to the fair market value, as on December 31, 2020.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2020
December	31	Net Unrealized Gains (Losses)			5,000
			Investments in AFS Securities			5,000
		(To record the adjustment of investment in AFS securities to the fair value)

Working note:

Determine the unrealized gain or loss on investment on December 31, 2020.

$\begin{array}{c}\begin{array}{l}\text{Unrealized }\\ \text{gain or }\left(\text{loss}\right)\end{array}\}\text{= }\left\{\begin{array}{l}\text{Fair value of investment on December 31, 2020 – }\\ \text{Book value before adjustment}\end{array}\right\}\\ \text{=\$168,000–\$173,000}\\ \text{=–\$5,000}\end{array}$

Prepare journal entry for adjusting the AFS securities to the fair market value, as on December 31, 2021.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2021
December	31	Net Unrealized Gains (Losses)			3,000
			Investments in AFS Securities			3,000
		(To record the adjustment of investment in AFS securities to the fair value)

Working note:

Determine the unrealized gain or loss on investment on December 31, 2021.

$\begin{array}{c}\begin{array}{l}\text{Unrealized }\\ \text{gain or }\left(\text{loss}\right)\end{array}\}\text{= }\left\{\begin{array}{l}\text{Fair value of investment on December 31, 2021 – }\\ \text{Book value before adjustment}\end{array}\right\}\\ \text{=\$165,000–\$168,000}\\ \text{=–\$3,000}\end{array}$

Prepare journal entry to record the sale of investment in available-for-sale securities.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2022
March	17	Cash			164,000
		Loss on sale of investments			6,000
			Net Unrealized Losses			6,000
			Investments in AFS Securities			164,000
		(To record the disposal of available-for-sale investment)

Working Notes:

Determine the unrealized gain or loss on investment on March 17, 2022.

$\begin{array}{c}\begin{array}{l}\text{Unrealized }\\ \text{gain or }\left(\text{loss}\right)\end{array}\}\text{= }\left\{\begin{array}{l}\text{Fair value of investment on March 17, 2022 – }\\ \text{Book value before adjustment}\end{array}\right\}\\ \text{=\$164,000–\$165,000}\\ \text{=–\$1,000}\end{array}$

Compute net balance of unrealized gains (losses).

Details	Amount ($)
Net unrealized gains (losses) on December 31, 2019	$3,000
Net unrealized gains (losses) on December 31, 2020	(5,000)
Net unrealized gains (losses) on December 31, 2021	(3,000)
Net unrealized gains (losses) on December 31, 2022	(1,000)
Net balance of unrealized gains (losses)	$(6,000)