Chapter C, Problem 1AP

To determine

Prepare journal entries to record the given transaction and prepare the adjusting entry to record the necessary fair value adjustments for the portfolio of trading securities.

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and equities.
• Credit, all increase in liabilities, revenues, and equities, all decrease in assets, and expenses.

Prepare the journal entries to record the given transactions as follows:

Date	Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
January 20, 2015	Short-Term Investments -Company F(1)		20,925
	Cash			20,925
	(To record the  Purchase of  800 shares for $26 per share along with a commission of $125)
February  9, 2015	Short-Term Investments-Company L (2)		97,928
	Cash			97,928
	(To record the  Purchase of  2,200 shares for $44.25 per share along with a commission of $578)
October 12, 2015	Short-Term Investments-Company Z (3)		5,825
	Cash			5,825
	((To record the  Purchase of  750 shares for $7.50 per share along with a commission of $200)
December 31, 2015	Fair value adjustment-company ST(4)		5,322
	Unrealized gain			5,322
	(To record the  fair value of securities)
April 15, 2016	Cash		22,915
	Gain on Sale of Short-Term Investments			1,990
	Short-Term Investments-Company  F(5)			20,925
	(To record the  sale of  800 shares at $29 per share)
July 5, 2016	Cash		7,585
	Gain on Sale of Short-Term Investments			1,760
	Short-Term Investments-Company  Z(6)			5,825
	(To record the  sale of 7500 shares at $10.25 per share)
July 22, 2016	Short-Term Investments-Company H (7)		48,444
	Cash			48,444
	(To record the  Purchase of 1,600 shares for $30 per share along with a commission of $444)
August 19, 2016	Short-Term Investment-Company D (8)		33,140
	Cash			33,140
	(To record the  Purchase of 1,800 shares for $18.25 per share along with a commission of $290)
December 31, 2016	Unrealized Loss		24,834
	Fair value adjustment-company ST $\left(\$19,512+\$5,322\right)$ (9)			24,834
	(To record the  fair value of securities)
February 27, 2017	Short-Term Investments -Company HC (10)		116,020
	Cash			116,020
	(To record the  Purchase of 3,400 shares for $34 per share along with a commission of $420)
March 3, 2017	Cash (11)		39,750
	Loss on Sale of Short-Term Investments		8,694
	Short-Term Investments-Company  H			48,444
	(To record the  sale of 1,600 shares at $25 per share)
June 21, 2017	Cash (12)		91,980
	Loss on Sale of Short-Term Investments		5,948
	Short-Term Investments-Company  L			97,928
	(To record the  sale of 2,200 shares at $42 per share)
June 30, 2017	Short-Term Investments -Company B&D (13)		57,595
	Cash			57,595
	(To record the  Purchase of 1,200 shares for $47.50 per share along with a commission of $595)
November 1, 2017	Cash		32,541
	Loss on Sale of Short-Term Investments		599
	Short-Term Investments-Company  D (14)			33,140
	(To record the  sale of 1,800 shares at $18.25 per share)
December 31, 2015	Fair value adjustment-company ST (15)		25,897
	Unrealized gain			25,897
	(To record the  fair value of securities)

Table (1)

Working note:

Calculate the purchased value of short-term investment (Company C)

$\begin{array}{c}\text{Short-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(800\times \$26\text{per}\text{share}\right)+\$125\\ =\$20,800+\$125\\ =\$20,925\end{array}$ (1)

Calculate the purchased value of short-term investment (Company L)

$\begin{array}{c}\text{Short-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(2,200\times \$44.25\text{per}\text{share}\right)+\$578\\ =\$97,350+\$578\\ =\$97,928\end{array}$ (2)

Calculate the purchased value of short-term investment (Company Z)

$\begin{array}{c}\text{Short-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(750\times \$7.50\text{per}\text{share}\right)+\$200\\ =\$5,625+\$200\\ =\$5,825\end{array}$ (3)

Calculate the fair value adjustment for 2015.

$\begin{array}{c}\begin{array}{l}\text{Unrealized Gain }\\ \text{or}\left(\text{loss}\right)\end{array}\}\text{ = Fair value}-\text{Toatl Purchase cost}\\ \text{= \$130,000}-\$20,925+\$97,928+\$5,825\\ =\$5,322\end{array}$ (4)

Calculate the value of cash received from the sale of stock investment (Company F stocks)

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(800\times \$29\right)-\$285\\ =\$23,200-\$285\\ =\$22,915\end{array}$ (5)

Calculate the value of cash received from the sale of stock investment (Company Z stocks)

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(750\times \$10.25\right)-\$102.5\\ =\$7,687.5-\$102.5\\ =\$7,585\end{array}$ (6)

Calculate the purchased value of short-term investment (Company H)

$\begin{array}{c}\text{Short-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(1,600\times \$30\text{per}\text{share}\right)+\$444\\ =\$48,000+\$444\\ =\$48,444\end{array}$ (7)

Calculate the purchased value of short-term investment (Company D)

$\begin{array}{c}\text{Short-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(1,800\times \$18.25\text{per}\text{share}\right)+\$290\\ =\$32,850+\$290\\ =\$33,140\end{array}$ (8)

Calculate the fair value adjustment for 2016.

$\begin{array}{c}\begin{array}{l}\text{Fair value adjustment}\\ \text{for 2016}\end{array}\}\text{ = }\left(\text{Fair value}-\left[\begin{array}{l}\text{Total Purchase cost}\\ \text{ of 2015}-\text{Sale}+\text{Total}\\ \text{Purchase cost of 2016}\end{array}\right]\right)\\ \text{= \$160,000}-\left[\begin{array}{l}\$124,678-\$20,925-\\ \$5,825+48,444+\$33,140\end{array}\right]\\ =\$160,000-\$179,512\\ =\$19,512\end{array}$ (9)

Calculate the purchased value of short-term investment (Company HC)

$\begin{array}{c}\text{Short-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(3,400\times \$34\text{per}\text{share}\right)+\$420\\ =\$115,600+\$420\\ =\$116,020\end{array}$ (10)

Calculate the value of cash received from the sale of stock investment (Company H stocks)

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(1,600\times \$25\right)-\$250\\ =\$40,000-\$250\\ =\$39,750\end{array}$ (11)

Calculate the value of cash received from the sale of stock investment (Company L stocks)

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(2,200\times \$42\right)-\$420\\ =\$92,400-\$420\\ =\$91,980\end{array}$ (12)

Calculate the purchased value of short-term investment (Company B&D)

$\begin{array}{c}\text{Short-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(1,200\times \$47.50\text{per}\text{share}\right)+\$595\\ =\$57,000+\$595\\ =\$57,595\end{array}$ (13)

Calculate the value of cash received from the sale of stock investment (Company D stocks)

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(1,800\times \$18.25\right)-\$309\\ =\$32,850-\$309\\ =\$32,541\end{array}$ (14)

Calculate the fair value adjustment for 2017.

$\begin{array}{c}\begin{array}{l}\text{Fair value adjustment}\\ \text{for 2017}\end{array}\}\text{ = }\left(\text{Fair value}-\left[\begin{array}{l}\text{Cost of 2016}+\\ \text{Purchase}-\text{Sale}\end{array}\right]+\text{Fair value of 2016}\right)\\ \text{= \$180,000}-\left[\begin{array}{l}\$179,512+\$116,020-\$48,444\\ -\$97,928+\$57,595-\$33,140\end{array}\right]+\$19,512\\ =\$180,000-\$173,615+19,512\\ =\$25,897\end{array}$ (15)