Chapter AH, Problem H.5P

(a)

To determine

Available-for-sale securities: Available-for-sale are short-term or long-term debt equity securities that are not classified as trading or held to maturity securities. These securities are readily sold in the short-term to receive return on investment.

To Record: The transactions and post to the account Stock Investments for Company K.

Explanation of Solution

Record the sale entry of stock investment.

Date		Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
2017
January	20	Cash		77,000
		Gain on Sale of Stock Investments			3,500 (1)
		Investment in Incorporation B Common Stock			73,500
		(To record the sale of Incorporation B common stock)

Table (1)

Working Note:

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

$\begin{array}{c}\begin{array}{l}\text{Realized gain }\left(\text{loss}\right)\\ \text{on investments}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Cash received –}\\ \text{Cost of stock investment }\end{array}\right\}\\ \text{= }\left(\text{1,400 shares}\times \text{\$55}\right)\text{–\$73,500}\\ \text{= \$77,000–\$73,500}\\ \text{= \$3,500}\end{array}$ (1)

Description:

• Cash is an asset account. The amount has increased because the asset is disposed and cash is received; therefore, debit Cash account with $77,000.
• Gain on Sale of Stock Investments is an equity account. Since gain has occurred from disposal, the Equity is increased; therefore, credit Gain on Sale of Stock Investments account with $3,500.
• Investment in Incorporation B Common Stock is an asset account. The amount has decreased because the asset is disposed; therefore, credit Investment in Incorporation B Common Stock account with $73,500.

Record the purchase entry of stock investments.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
January	28	Investment in Corporation PW Common Stock		31,200 (2)
		Cash			31,200
		(To record the purchase of stock of Corporation PW)

Table (2)

Working Note:

Compute amount of cash paid to acquire Corporation PW stock.

$\begin{array}{c}\text{Cash paid = }\left\{\begin{array}{l}\text{Number of shares × }\\ \text{Cost per share}\end{array}\right\}\\ \text{= 400 shares ×\$78}\\ \text{= \$31,200}\end{array}$ (2)

Description:

• Investment in Corporation PW Common Stock is an asset account. The amount has increased due to purchase of stock investment; therefore, debit Investment in Corporation PW Common Stock account with $31,200.
• Cash is an asset account. The amount has decreased because the stock investment is purchased for cash; therefore, credit Cash account with $31,200.

Record the receipt of dividend on stock investment.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
January	30	Cash		1,500
		Dividend Revenue			1,500 (3)
		(To record receipt of dividend on Corporation M’s common stock)

Table (3)

Working Note:

Compute amount of dividend received on Corporation M’s stock.

$\begin{array}{c}\text{Dividend received = }\left\{\begin{array}{l}\text{Number of shares × }\\ \text{Dividend per share}\end{array}\right\}\\ \text{= 1,200 shares ×\$1}\text{.25}\\ \text{= \$1,500}\end{array}$ (3)

Description:

• Cash is an asset account. The amount has increased because interest is received; therefore, debit Cash account with $1,500.
• Dividend Revenue is a revenue account. Revenue increases stockholders’ equity account. Therefore, credit Dividend Revenue account with $1,500.

Record the receipt of dividend on stock investment.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
February	8	Cash		320
		Dividend Revenue			320 (4)
		(To record receipt of dividend on Corporation PT’s preferred stock)

Table (4)

Working Note:

Compute amount of dividend received on Corporation PT’s stock.

$\begin{array}{c}\text{Dividend received = }\left\{\begin{array}{l}\text{Number of preferred shares × }\\ \text{Cash dividend per share}\end{array}\right\}\\ \text{= 800 shares ×\$0}\text{.40}\\ \text{= \$320}\end{array}$ (4)

Description:

• Cash is an asset account. The amount has increased because interest is received; therefore, debit Cash account with $320.
• Dividend Revenue is a revenue account. Revenue increases stockholders’ equity account. Therefore, credit Dividend Revenue account with $320.

Record the sale entry of stock investments.

Date		Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
2017
February	18	Cash		28,000
		Loss on Sale of Stock Investments		5,600 (5)
		Investment in Corporation PT- Preferred Stock			33,600
		(To record the sale of Corporation PT preferred stock)

Table (5)

Working Note:

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

$\begin{array}{c}\begin{array}{l}\text{Realized gain }\left(\text{loss}\right)\\ \text{on investments}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Cash received –}\\ \text{Cost of stock investment }\end{array}\right\}\\ \text{= }\left(\text{800 shares}\times \text{\$35}\right)\text{–\$33,600}\\ \text{= \$28,000–\$33,600}\\ \text{= \$}\left(5,600\right)\end{array}$ (5)

Description:

• Cash is an asset account. The amount has increased because the asset is disposed and cash is received; therefore, debit Cash account with $28,000.
• 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 $5,600.
• Investment in Corporation PT Preferred Stock is an asset account. The amount has decreased because the asset is disposed; therefore, credit Investment in Corporation PT Preferred Stock account with $33,600.

Record the receipt of dividend on stock investment.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
July	30	Cash		1,320
		Dividend Revenue			1,320 (6)
		(To record receipt of dividend on Corporation M’s common stock)

Table (6)

Working Note:

Compute amount of dividend received on Corporation M’s stock.

$\begin{array}{c}\text{Dividend received = }\left\{\begin{array}{l}\text{Number of shares × }\\ \text{Dividend per share}\end{array}\right\}\\ \text{= 1,200 shares ×\$1}\text{.10}\\ \text{= \$1,320}\end{array}$ (6)

Description:

• Cash is an asset account. The amount has increased because interest is received; therefore, debit Cash account with $1,320.
• Dividend Revenue is a revenue account. Revenue increases stockholders’ equity account. Therefore, credit Dividend Revenue account with $1,320.

Record the purchase entry of stock investments.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
September	6	Investment in Corporation PW Common Stock		49,200 (7)
		Cash			49,200
		(To record the purchase of common stock of Corporation PW)

Table (7)

Working Note:

Compute amount of cash paid to acquire Corporation PW stock.

$\begin{array}{c}\text{Cash paid = }\left\{\begin{array}{l}\text{Number of shares × }\\ \text{Cost per share}\end{array}\right\}\\ \text{= 600 shares ×\$82}\\ \text{= \$49,200}\end{array}$ (7)

Description:

• Investment in Corporation PW Common Stock is an asset account. The amount has increased due to purchase of stock investment; therefore, debit Investment in Corporation PW Common Stock account with $49,200.
• Cash is an asset account. The amount has decreased because the stock investment is purchased for cash; therefore, credit Cash account with $49,200.

Record the receipt of dividend on stock investment.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
December	1	Cash		1,500
		Dividend Revenue			1,500 (8)
		(To record receipt of dividend on Corporation PW’s common stock)

Table (8)

Working Note:

Compute amount of dividend received on Corporation PW’s stock.

$\begin{array}{c}\text{Dividend received = }\left\{\begin{array}{l}\text{Number of shares × }\\ \text{Dividend per share}\end{array}\right\}\\ \text{= }\left(\text{600 shares+400 shares}\right)\text{ ×\$1}\text{.50}\\ \text{= 1,000 shares ×\$1}\text{.50}\\ \text{= \$1,500}\end{array}$ (8)

Description:

• Cash is an asset account. The amount has increased because interest is received; therefore, debit Cash account with $1,500.
• Dividend Revenue is a revenue account. Revenue increases stockholders’ equity account. Therefore, credit Dividend Revenue account with $1,500.

Prepare T-accounts of stock investment accounts from the above transactions recorded.

Investment in Incorporation B Account

Investment in Incorporation B
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31	Cash	73,500		January 20	Cash	73,500
	Balance	$0

Table (9)

Investments in Corporation M Account

Investment in Corporation M
Date	Details	Debit ($)		Date	Details	Credit ($)
January 28	Cash	84,000

Table (10)

Investments in Corporation PW Account

Investment in Corporation PW
Date	Details	Debit ($)		Date	Details	Credit ($)
January 28	Cash	31,200
September 6	Cash	49,200
	Balance	80,400

Table (11)

Investment in Corporation PT Account

Investment in Corporation PT
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31	Cash	33,600		February 18	Cash	28,000
				February 18	Loss on sale of stock investment	5,600
	Balance	$0

Table (12)

(b)

To determine

To Record: The adjusting entry to show the securities at fair value on December 31, 2017.

Explanation of Solution

Record the unrealized loss on available-for-sale securities.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
December	31	Unrealized Gain or Loss–Equity		9,400 (9)
		Fair Value Adjustment – Available-for-sale			9,400
		(To record unrealized loss on available-for-sale securities)

Table (13)

Description:

• Unrealized Gain or Loss–Equity is an adjustment account to report the investment at fair market value. Since loss has occurred while adjusting; therefore, debit Unrealized Gain or Loss–Equity account with $9,400.
• Fair Value Adjustment–Available-for-Sale is a contra-asset account. The account shows a credit balance since the market price has decreased (loss); therefore, credit Fair Value Adjustment–Available-for-Sale with $9,400.

Working Note:

Compute the unrealized gain (loss) from available-for-sale securities as on December 31.

Investment	Fair Value ($)	Cost ($)	Unrealized Gain ($)
	(A)	(B)	(C) = (A) – (B)
Corporation M	78,000 $\left(\$65\times 1,200\text{Shares}\right)$	84,000 $\left(\$70\times 1,200\text{Shares}\right)$	(6,000)
Corporation PW	30,800 $\left(\$77\times 400\text{Shares}\right)$	31,200 $\left(\$78\times 400\text{Shares}\right)$	(400)
Corporation PW	46,200 $\left(\$77\times 600\text{Shares}\right)$	49,200 $\left(\$82\times 600\text{Shares}\right)$	(3,000)
Total	155,000	164,400	(9,400)

(9)

Table (14)

(c)

To determine

To Prepare: The balance sheet presentation of investments for Company K.

Explanation of Solution

Prepare the balance sheet for Company K.

Company K
Balance Sheet (Partial)
December 31, 2017
Particular	Amount ($)
Investments
Investment in stock of less than 20% owned in Corporation M, at fair value	78,000
Investment in stock of less than 20% owned in Corporation PW, at fair value.	77,000
Stockholders’ Equity
Accumulated other comprehensive loss	(9,400)

Table (15)