Chapter AH, Problem H.2P

(a)

To determine

Debt investments: It refers to the investments made in debts by the investor for which it lends funds to the borrowing company at a predetermined interest and the debt amount is repaid on the maturity date. For example, corporate bonds, government bonds, certificate of deposits.

Stock Investments: It refers to the investment in a financial instrument known as stock that, gives the right of ownership to an investor equal to the amount invested in the company. Thus, it enables a stockholder to claim in the profits and the assets of the company.

To Record: The transactions and post to the accounts Debt Investments and Stock Investments.

Explanation of Solution

Journalize the investments transactions for Company N.

Record the purchase entry of stock investment.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
February	1	Stock Investments		51,600
		Cash			51,600
		(To record the purchase of stock of Company L)

Table (1)

Description:

• Stock Investments is an asset account. The amount has increased due to purchase of stock investment; therefore, debit Stock Investments account with $51,600.
• Cash is an asset account. The amount has decreased because the stock investment is purchased for cash; therefore, credit Cash account with $51,600.

Record the purchase entry of stock investment.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
March	1	Stock Investments		18,500
		Cash			18,500
		(To record the purchase of stock of Company NC)

Table (2)

Description:

• Stock Investments is an asset account. The amount has increased due to purchase of stock investment; therefore, debit Stock Investments account with $18,500.
• Cash is an asset account. The amount has decreased because the stock investment is purchased for cash; therefore, credit Cash account with $18,500.

Record the purchase entry of debt investment.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
April	1	Debt Investments		70,000
		Cash			70,000
		(To record the purchase of debt investments)

Table (3)

Description:

• Debt Investments is an asset account. The amount has increased due to purchase of stock investment; therefore, debit Debt Investments account with $70,000.
• Cash is an asset account. The amount has decreased because the debt investment is purchased for cash; therefore, credit Cash account with $70,000.

Record the receipt entry of dividend on stock investment.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
July	1	Cash		960
		Dividend Revenue			960 (1)
		(To record receipt of dividend on stock investments)

Table (4)

Working Note:

Compute amount of dividend received on Company L’s stock.

$\begin{array}{c}\text{Dividend received = }\left\{\begin{array}{l}\text{Number of shares × }\\ \text{Dvidend per share}\end{array}\right\}\\ \text{= 1,200 shares ×\$0}\text{.8}\\ \text{= \$960}\end{array}$ (1)

Description:

• Cash is an asset account. The amount has increased because interest is received; therefore, debit Cash account with $960.
• Dividend Revenue is a revenue account. Revenue increases stockholders’ equity account. Therefore, credit Dividend Revenue account with $960.

Record the sale entry of stock investment.

Date		Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
2017
August	1	Cash		8,400
		Loss on Sale of Stock Investments		200 (3)
		Stock Investments			8,600 (2)
		(To record the sale of stock investment)

Table (5)

Working Notes:

Compute cost of stock investment sold.

$\begin{array}{c}\begin{array}{l}\text{Cost of stock }\\ \text{investment sold}\end{array}\}\text{ = Number of shares sold × Price per share}\\ \text{= Number of shares sold ×}\frac{\text{Cost of 1,200 shares}}{\text{Number of shares}}\\ \text{= 200 shares ×}\frac{\text{\$51,600}}{\text{1,200 shares}}\\ \text{= 200 shares × \$43}\\ \text{= \$8,600}\end{array}$ (2)

Compute realized gain (loss) on sale of stock.

$\begin{array}{c}\begin{array}{l}\text{Realized gain }\left(\text{loss}\right)\\ \text{on investments}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Cash received –}\\ \text{Cost of stock investment }\end{array}\right\}\\ \text{= }\left(\text{200 shares}\times \text{\$42}\right)\text{–\$8,600}\\ \text{= \$8,400–\$8,600}\\ \text{= \$}\left(\text{200}\right)\end{array}$ (3)

Description:

• Cash is an asset account. The amount has increased because the asset is disposed and cash is received; therefore, debit Cash account with $8,400.
• Loss on Sale of Stock Investments is an equity account. Since loss has occurred from disposal, the Equity is decreased; therefore, debit Loss on Sale of Stock Investments account with $200.
• Stock Investments is an asset account. The amount has decreased because the asset is disposed; therefore, credit Stock Investments account with $8,600.

Record the receipt entry of dividend on stock investment.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
September	1	Cash		1,000
		Dividend Revenue			1,000 (4)
		(To record receipt of dividend on stock investments)

Table (6)

Working Note:

Compute amount of dividend received on Company NC’s stock.

$\begin{array}{c}\text{Dividend received = }\left\{\begin{array}{l}\text{Number of shares × }\\ \text{Dvidend per share}\end{array}\right\}\\ \text{= 500 shares ×\$2}\\ \text{= \$1,000}\end{array}$ (4)

Description:

• Cash is an asset account. The amount has increased because interest is received; therefore, debit Cash account with $1,000.
• Dividend Revenue is a revenue account. Revenue increases stockholders’ equity account. Therefore, credit Dividend Revenue account with $1,000.

Record the receipt entry of semiannual interest on debt investment.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
October	1	Cash		2,800
		Interest Revenue			2,800 (5)
		(To record receipt of semiannual interest on debt investments)

Table (7)

Working Note:

Compute amount of interest received on bonds invested in Company T.

$\begin{array}{c}\text{Interest received = }\left\{\begin{array}{l}\text{Amount of debt investment × }\\ \text{Rate of interest}\times \\ \text{Time period}\left(\text{April 1,2017 to October 1, 2017}\right)\end{array}\right\}\\ \text{= \$70,000×8\%}\times \frac{6}{12}\\ \text{= \$2,800}\end{array}$ (5)

Description:

• Cash is an asset account. The amount has increased because interest is received; therefore, debit Cash account with $2,800.
• Interest Revenue is a revenue account. Revenue increases stockholders’ equity account. Therefore, credit Interest Revenue account with $2,800.

Record the sale entry of debt investment.

Date		Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
2017
October	1	Cash		75,700
		Gain on Sale of Debt Investments			5,700 (6)
		Debt Investments			70,000
		(To record the sale of debt investment)

Table (8)

Working Note:

Calculate the realized gain (loss) on sale of bonds.

Particulars	Amount ($)
Cash proceeds from sale of bonds	75,700
Less: Cost of bonds	70,000
Gain (loss) on sale of bonds	5,700

(6)

Table (9)

Description:

• Cash is an asset account. The amount has increased because the asset is disposed and cash is received; therefore, debit Cash account with $75,700.
• Gain on Sale of Debt Investments is an equity account. Since gain has occurred from disposal, the Equity is increased; therefore, credit Gain on Sale of Debt Investments account with $5,700.
• Debt Investments is an asset account. The amount has decreased because the asset is disposed; therefore, credit Debt Investments account with $70,000.

Prepare T-accounts of Debt Investment account, and Stock Investment accounts from the above transactions recorded.

Stock Investments Account:

Stock Investments
Date	Details	Debit ($)		Date	Details	Credit ($)
February 1	Cash	51,600		August 1	Cash	8,400
March 1	Cash	18,500		August 1	Loss on sale of stock investments	200
				December 31	Balance	$61,500
December 31	Total	70,100		December 31	Total	70,100

Table (10)

Debt Investments Account:

Debt Investments
Date	Details	Debit ($)		Date	Details	Credit ($)
April 1	Cash	70,000		October 1	Cash	75,700
October 1	Gain on sale	5,700		December 31	Balance	0
December 31	Total	75,700		December 31	Total	75,700

Table (11)

(b)

To determine

To Prepare: The adjusting entry to report the investments at fair value at December 31, 2017.

Explanation of Solution

Record the unrealized loss on trading securities.

Date		Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
2017
December	31	Unrealized Loss–Income		7,500 (7)
		Fair Value Adjustment–Trading			7,500
		(To record unrealized loss on trading securities)

Table (12)

Description:

• Unrealized Loss–Income is an adjustment account to report loss on adjusting investment cost at fair market value. Since loss has occurred while adjusting; therefore, debit Unrealized Loss–Income account with $7,500.
• Fair Value Adjustment–Trading is a contra-asset account. The account shows a credit balance since the market price has decreased (loss); therefore, credit Fair Value Adjustment–Trading with $7,500.

Working Notes:

Compute the unrealized gain (loss) from trading securities as on December 31.

Investment	Fair Value ($)	Cost ($)	Unrealized Loss ($)
	(A)	(B)	(C) = (A) – (B)
Company L	39,000 $\left(\$39\times 1,000\text{Shares}\right)$	43,000 $\left(\$43\times 1,000\text{Shares}\right)$	(4,000)
Company NC	15,000 $\left(\$30\times 500\text{Shares}\right)$	18,500 $\left(\$37\times 500\text{Shares}\right)$	(3,500)
Total	54,000	61,500	(7,500)

(7)

Table (13)

(c)

To determine

To Prepare: The investments section of balance sheet of Company N.

Explanation of Solution

Prepare the balance sheet of Company N.

Company N
Balance Sheet (Partial)
December 31, 2017
Particulars	Amount ($)
Investments
Investment in stock of less than 20% owned in  companies, at fair value	54,000

Table (14)

 (d)

To determine

To Identify: The income statement accounts and present the statement classification of each account.

Explanation of Solution

Prepare the presentation of related income statement accounts pertaining to stock and debt investments.

Company N
Income Statement (Partial)
December 31, 2017
Particulars	Amount ($)
Other Revenues and Gains:
Dividend revenue	$1,960
Interest revenue	2,800
Gain on sale of debt investment	5,700
Other Expenses and Losses:
Loss on sale of stock investment	200
Unrealized loss–Income	7,500

Table (15)