FINANCIAL ACCOUNTING W/CONNECT PKG
FINANCIAL ACCOUNTING W/CONNECT PKG
10th Edition
ISBN: 9781264094639
Author: Libby
Publisher: MCG
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Chapter A, Problem 5P

1.

To determine

Journalize the entries related to investment, in the books of Corporation J, assuming the portfolio as trading securities

1.

Expert Solution
Check Mark

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.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2019    
August4Investments in TS 180,000 
     Cash  180,000
  (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.

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

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2019    
December31Net Unrealized Gains (Losses) 10,000 
   Investments in TS  10,000
  (To record the adjustment of cost of investment in TS to the fair value)   

Table (2)

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:

Compute the fair value of investment on December 31, 2019.

Fair value=Number of shares×Market price per share= 2,000 shares × $85 per share= $170,000

Compute unrealized gain or loss on investment in TS.

Unrealized gain or (loss)}{ Fair value of investment on December 31, 2019 – Cost of investment on August 4, 2019}=$170,000–$180,000=$(10,000)

Note: Refer to Equation (1) for value and computation of fair value of investment on December 31, 2015.

Prepare journal entry for dividend received in 2020.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2020    
June1Dividend receivable 7,000 
   Dividend revenue  7,000
  (To record receipt of dividend)   

Table (3)

  • Dividends receivable is an asset account. Since dividend is received, asset account increased, and an increase in asset is debited.
  • Dividend revenue is a revenue account and it is increased therefore, credit the dividend revenue.

Prepare journal entry for cash dividend received in 2020.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2020    
July1Cash 7,000 
   Dividend Receivable  7,000
  (To record receipt of dividend)   

Table (4)

Description:

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Dividends receivable is an asset account. Since dividend is received, asset account decreased, and a decrease in asset is credited.

Working Notes:

Compute amount of dividend received.

Dividend received={Number of shares×Dividend per share}=2,000 shares×$3.50 per share=$7,000

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

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2020    
December31Investments in TS 12,000 
   Net Unrealized Gains (Losses)  12,000
  (To record the adjustment of investment in TS to the fair value)   

Table (5)

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:

Compute the fair value of investment on December 31, 2020.

Fair value=Number of shares×Market price per share= 2,000 shares × $91 per share= $182,000

Compute unrealized gain or loss on investment in TS.

Unrealized gain or (loss)}{Fair value of investment on December 31, 2020 – Fair value of investment on December 31, 2019}=$182,000–$170,000=$12,000

Note: Refer to Equations (3) and (1) for both the values.

Prepare journal entry for cash dividend received in 2021.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2021    
July1Dividend receivable 7,000 
   Dividend Revenue  7,000
  (To record receipt of dividend)   

Table (6)

  • Dividends receivable is an asset account. Since dividend is received, asset account increased, and an increase in asset is debited.
  • Dividend Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.

Prepare journal entry for cash dividend received in 2021.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2021    
June1Cash 7,000 
   Dividend Receivable  7,000
  (To record receipt of dividend)   

Table (7)

Description:

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Dividends receivable is an asset account. Since dividend is received, asset account increased, and an increase in asset is debited.

Note: Refer to Equation (2) for value and computation of dividend revenue.

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

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2021    
December31Investments in TS 6,000 
   Net Unrealized Gains (Losses)  6,000
  (To record the adjustment of investment in TS to the fair value)   

Table (8)

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:

Compute the fair value of investment on December 31, 2021.

Fair value=Number of shares×Market price per share= 2,000 shares × $94 per share= $188,000

Compute unrealized gain or loss on investment in TS.

Unrealized gain or (loss)}{Fair value of investment on December 31, 2017 – Fair value of investment on December 31, 2016}=$188,000–$182,000=$6,000

Note: Refer to Equations (4) and (3) for both the values.

2.

To determine

Journalize the entries related to investment, in the books of Corporation J, assuming the portfolio as available-for-sale securities

2.

Expert Solution
Check Mark

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.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2019    
August4Investments in AFS Securities 180,000 
     Cash  180,000
  (To record purchase of investment in AFS securities)   

Table (9)

Description:

  • Investments in AFS Securities 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.

Prepare journal entry for equity in investee earnings.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2019    
December31Investments in AFS Securities 9,000 
     Equity in investee earnings  9,000
  (To record equity in investee earnings)   

Table (10)

  • Investments in AFS Securities is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
  • Equity in investee earnings is an income account and it is increased. Therefore, credit the equity in investee earnings.

Prepare journal entry for adjusting the cost of AFS securities to the fair market value, as on June 1, 2020.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2020    
June1Dividend receivable 7,000 
   Investment  7,000
  (To record the adjustment of cost of investment in AFS securities to the fair value)   

Table (11)

Description:

  • Dividends receivable is an asset account. Since dividend is received, asset account increased, and an increase in asset is debited.
  • Investments in AFS Securities is an asset account. The account is credited because the market price was decreased, and eventually the asset value decreased.

Prepare journal entry for cash dividend received in 2020.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2020    
July1Cash 7,000 
   Dividend Receivable  7,000
  (To record receipt of dividend)   

Table (12)

Description:

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Dividends receivable is an asset account. Since dividend is received, asset account increased, and an increase in asset is debited.

Note: Refer to Equation (2) for value and computation of dividend revenue.

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

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2020    
December31Investments in AFS Securities 9,000 
   Equity in investee earnings  9,000
  (To record the equity in investee earnings)   

Table (13)

Description:

  • Investments in AFS Securities is an asset account. The account is debited because the market price was increased, and eventually the asset value increased.
  • Equity in investee earnings is an income account and it is increased. Therefore, credit the equity in investee earnings.

Prepare journal entry for adjusting the cost of AFS securities to the fair market value, as on June 1, 2021.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2021    
June1Dividend receivable 7,000 
   Investment  7,000
  (To record the adjustment of cost of investment in AFS securities to the fair value)   

Table (14)

Description:

  • Dividends receivable is an asset account. Since dividend is received, asset account increased, and an increase in asset is debited.
  • Investments in AFS Securities is an asset account. The account is credited because the market price was decreased, and eventually the asset value decreased.

Prepare journal entry for cash dividend received in 2020.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2021    
July1Cash 7,000 
   Dividend Receivable  7,000
  (To record receipt of dividend)   

Table (15)

Description:

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Dividends receivable is an asset account. Since dividend is received, asset account increased, and an increase in asset is debited.

Note: Refer to Equation (2) for value and computation of dividend revenue.

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

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2021    
December31Investments in AFS Securities 9,000 
   Equity in investee earnings  9,000
  (To record the equity in investee earnings)   

Table (16)

Description:

  • Investments in AFS Securities is an asset account. The account is debited because the market price was increased, and eventually the asset value increased.
  • Equity in investee earnings is an income account and it is increased. Therefore, credit the equity in investee earnings.

Note: Refer to Equations (7) and (6) for both the values.

  • Equity in Affiliate Earnings is a revenue account. Revenues increase stockholders’ equity value, and an increase in stockholders’ equity is credited.

Note: Refer to Equation (8) for value and computation of investment revenue.

Prepare journal entry for dividends received from affiliate, in 2017.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2017    
June1Cash 7,000 
   Investments in Affiliates  7,000
  (To record dividends received from investee)   

Table (17)

Description:

  • Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
  • Investments in Affiliates is an asset account. Since stock investments are reduced as an effect of receipt of dividends, asset value decreased, and a decrease in asset is credited.

Note: Refer to Equation (2) for value and computation of dividend revenue.

Prepare journal entry for share of income received from Company K in 2017.

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
2017    
December31Investments in Affiliates 9,000 
   Equity in Affiliate Earnings  9,000
  (To record income received from affiliates)   

Table (18)

Description:

  • Investments in Affiliates is an asset account. Since share of income received from investee increases the investment value, asset value increased, and an increase in asset is debited.
  • Equity in Affiliate Earnings is a revenue account. Revenues increase stockholders’ equity value, and an increase in stockholders’ equity is credited.

Note: Refer to Equation (8) for value and computation of investment revenue.

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FINANCIAL ACCOUNTING W/CONNECT PKG

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