1.
Prepare
1.
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.
2.
Journalize the entries related to investment in trading securities.
2.
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.
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.
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.
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.
2.
Journalize the entries related to investment in available-for-sale securities.
2.
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.
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.
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.
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.
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) |
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Chapter A Solutions
Financial Accounting
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