Explanation 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 ($) Credit ($) 2016 June 30 Investments in TS 105,000 Cash 105,000 (To record purchase of investment in TS) Table (1) Description: Investments in TS is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited. Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited. Working Notes: Compute cost of investment in TS. Cost of investment = Number of shares × Price per share = 7 , 00 0 shares × $15 per share = $ 105 , 000 (1) Prepare journal entry for adjusting the cost of TS to the fair market value, as on December 31, 2016 . Date Account Titles and Explanation Post Ref. Debit ($) Credit ($) 2016 December 31 Investments in TS 14,000 Net Unrealized Gains (Losses) 14,000 (To record the adjustment of cost of investment in TS to the fair value) Table (2) Description: Investments in TS is an asset account. The account is debited because the market price was increased, and eventually the asset value increased. Net Unrealized Gains (Losses) 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. This gain is reported as gain under net income. Working Notes: Determine the unrealized gain or loss on investment on December 31, 2016. Step 1: Compute the fair value of investment on December 31, 2016. Fair value = Number of shares×Market price per share = 7,000 shares × $17 per share = $119,000 (2) Step 2: Compute unrealized gain or loss on investment in AFS securities. Unrealized gain or ( loss ) } = { Fair value of investment on December 31, 2016 – Cost of investment on June 30, 2016 } =$119,000–$105,000 =$14,000 Note: Refer to Equations (2) and (1) for both the values. Prepare journal entry for adjusting the cost of TS securities to the fair market value, as on December 31, 2017 . Date Account Titles and Explanation Post Ref. Debit ($) Credit ($) 2017 December 31 Net Unrealized Gains (Losses) 21,000 Investments in TS 21,000 (To record the adjustment of cost of investment in TS to the fair value) Table (3) Description: Net Unrealized Gains (Losses) is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses decrease stockholders’ equity value, a decrease in stockholders’ equity value is debited. This loss is reported as loss under net income. Investments in TS is an asset account. The account is credited because the market price was decreased, and eventually the asset value decreased. Working Notes: Determine the unrealized gain or loss on investment in TS. Step 1: Compute the fair value of investment on December 31, 2017. Fair value = Number of shares×Market price per share = 7,000 shares × $14 per share = $98,000 (3) Step 2: Compute unrealized gain or loss on investment in TS

16th Edition

ISBN: 9781308821672

Author: Libby

Publisher: MCG/CREATE

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Chapter A, Problem 4E

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Journalize the entries related to investment in trading securities.

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Use the following information on a company’s investments in equity securities to answer questions 1- 2 below. The company’s accounting year ends December 31. Investment Date of acquisition Cost Fair value 12/31/16 Date sold Selling price Ajax Company stock 6/20/16 $40,000 $35,000 2/10/17 $32,000 Bril Corporation stock 5/1/16 20,000 N/A 11/15/16 26,000 Coy Company stock 8/2/16 16,000 16,500 1/17/17 23,000 1. If the above investments are categorized as trading securities, what amount is reported for gain or loss on securities, on the 2016 income statement? 2. If the above investments are categorized as trading securities, what amount is reported for gain or loss on securities, on the 2017 income statement?

Chapter A Solutions

FINANCIAL ACCOUNTING 9TH

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Ch. A - Prob. 2MCQ Ch. A - Dividends received from stock that is reported as...Ch. A - Prob. 4MCQ Ch. A - Prob. 5MCQ Ch. A - When using the equity method of accounting, when...Ch. A - Prob. 7MCQ Ch. A - Prob. 8MCQ Ch. A - Which of the following is true regarding the...Ch. A - Prob. 10MCQ Ch. A - Matching Measurement and Reporting Methods Match...Ch. A - Prob. 2ME Ch. A - Prob. 3ME Ch. A - Prob. 4ME Ch. A - Prob. 5ME Ch. A - Prob. 6ME Ch. A - Prob. 7ME Ch. A - Prob. 8ME Ch. A - Prob. 9ME Ch. A - Prob. 10ME Ch. A - Prob. 11ME Ch. A - Prob. 1E Ch. A - Prob. 2E Ch. A - Recording Transactions in the Available-for-Sale...Ch. A - Prob. 4E Ch. A - Prob. 5E Ch. A - Reporting Gains and Losses in the Trading...Ch. A - Prob. 7E Ch. A - Prob. 8E Ch. A - Prob. 9E Ch. A - Prob. 10E Ch. A - Prob. 11E Ch. A - Prob. 1P Ch. A - Prob. 2P Ch. A - Prob. 3P Ch. A - Prob. 4P Ch. A - Prob. 5P Ch. A - Comparing Methods to Account for Various Levels of...Ch. A - Prob. 7P Ch. A - Recording Investments for Significant Influence LO...Ch. A - Prob. 9P Ch. A - Prob. 10P Ch. A - Prob. 11P Ch. A - Prob. 1AP Ch. A - Prob. 2AP Ch. A - Reporting Passive Investments During January 2017,...Ch. A - Prob. 4AP Ch. A - Prob. 5AP Ch. A - Prob. 6AP Ch. A - Prob. 1CON Ch. A - Finding Financial Information Refer to the...Ch. A - Prob. 2CP Ch. A - Prob. 3CP Ch. A - Prob. 4CP Ch. A - Prob. 5CP Ch. A - Prob. 6CP

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Journalize the entries related to investment in trading securities.

Solution Summary: The author explains that journal entry is a set of economic events which can be measured in monetary terms.

Journalize the entries related to investment in trading securities.

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Chapter A Solutions