Chapter C, Problem 1BP

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 ($)	Credit ($)
March 10, 2015	Short-Term Investments -Company AOL (1)		143,505
	Cash			143,505
	(To record the  Purchase of 2,400 shares for $59.15 per share alone with a commission of $1,545)
May 7, 2015	Short-Term Investments-Company MTV (2)		184,105
	Cash			184,105
	(To record the  Purchase of  5,000 shares for $36.25 per share alone with a commission of $2,855)
September 1, 2015	Short-Term Investments-Company UPS (3)		69,950
	Cash			69,950
	((To record the  Purchase of 1,200 shares for $57.25 per share alone with a commission of $1,250)
December 31, 2015	Unrealized gain		17,560
	Fair value adjustment-company ST(4)			17,560
	(To record the  fair value of securities)
April 26, 2016	Cash (5)		170,450
	Loss on Sale of Short-Term Investments		13,655
	Short-Term Investments-Company  MTV			184,105
	(To record the  sale of  5,000 shares at $34.50 per share)
April 27, 2016	Cash (6)		70,812
	Gain on Sale of Short-Term Investments			862
	Short-Term Investments-Company  UPS			69,950
	(To record the  sale of 1,200 shares at $60.50 per share)
June 2, 2016	Short-Term Investments-Company SPW (7)		622,450
	Cash			622,450
	(To record the  Purchase of 3,600 shares for $172 per share alone with a commission of $3,250)
June 14, 2016	Short-Term Investment-Company W-M (8)		46,307
	Cash			46,307
	(To record the  Purchase of 900 shares for $50.25 per share alone with a commission of $1,082)
December 31, 2016	Fair value adjustment-company ST $\left(\$15,738+\$17,560\right)$ (9)		33,298
	Unrealized Gain			33,298
	(To record the  fair value of securities)
January 28, 2017	Short-Term Investments -Company P (10)		88,890
	Cash			88,890
	(To record the  Purchase of 2,000 shares for $43 per share alone with a commission of $2,890)
January 31, 2017	Cash (11)		602,760
	Loss on Sale of Short-Term Investments		19,690
	Short-Term Investments-Company  SPW			622,450
	(To record the  sale of 3,600 shares at $168 per share)
August 22, 2017	Cash (12)		133,720
	Loss on Sale of Short-Term Investments		9,785
	Short-Term Investments-Company  AOL			143,505
	(To record the  sale of 2,400 shares at $56.75 per share)
September 3, 2017	Short-Term Investments -Company V (13)		62,430
	Cash			62,430
	(To record the  Purchase of 1,500 shares for $40.50 per share alone with a commission of $1,680)
October 9, 2017	Cash (14)		47,155
	Gain on Sale of Short-Term Investments			848
	Short-Term Investments-Company  W-M			46,307
	(To record the  sale of 1,800 shares at $18.25 per share)
December 31, 2017	Unrealized Loss		27,058
	Fair value adjustment-company ST (15)			27,058
	(To record the  fair value of securities)

Table (1)

Working note:

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

$\begin{array}{c}\text{Short-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(2,400\times \$59.15\text{per}\text{share}\right)+\$1,545\\ =\$143,505\end{array}$ (1)

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

$\begin{array}{c}\text{Short-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(5,000\times \$36.25\text{per}\text{share}\right)+\$2,855\\ =\$184,105\end{array}$ (2)

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

$\begin{array}{c}\text{Short-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(1,200\times \$57.25\text{per}\text{share}\right)+\$1,250\\ =\$69,950\end{array}$ (3)

Calculate the fair value adjustment for 2015.

$\begin{array}{c}\begin{array}{l}\text{Unrealized Gain }\\ \text{or}\left(\text{loss}\right)\end{array}\}\text{ = Fair value}-\text{Toatl Purchase cost}\\ \text{= \$380,000}-\$143,505+\$184,105+\$69,950\\ =\$17,560\end{array}$ (4)

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

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(5,000\times \$34.50\right)-\$2,050\\ =\$170,450\end{array}$ (5)

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

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(1,200\times \$60.50\right)-\$1,788\\ =\$70,812\end{array}$ (6)

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

$\begin{array}{c}\text{Short-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(3,600\times \$172\text{per}\text{share}\right)+\$3,250\\ =\$622,450\end{array}$ (7)

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

$\begin{array}{c}\text{Short-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(900\times \$50.25\text{per}\text{share}\right)+\$1,082\\ =\$46,307\end{array}$ (8)

Calculate the fair value adjustment for 2016.

$\begin{array}{c}\begin{array}{l}\text{Fair value adjustment}\\ \text{for 2016}\end{array}\}\text{ = }\left(\text{Fair value}-\left[\begin{array}{l}\text{Total Purchase cost}\\ \text{ of 2015}-\text{Sale}+\text{Total}\\ \text{Purchase cost of 2016}\end{array}\right]\right)\\ \text{= \$828,000}-\left[\begin{array}{l}\text{\$397,560}-\text{\$184,105}-\\ \text{\$69,950}+\text{622,450}+\text{\$46,307}\end{array}\right]\\ =\$828,000-\$812,262\\ =\$15,738\end{array}$ (9)

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

$\begin{array}{c}\text{Short-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(2,000\times \$43\text{per}\text{share}\right)+\$2,890\\ =\$88,890\end{array}$ (10)

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

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(3,600\times \$168\right)-\$2,040\\ =\$602,760\end{array}$ (11)

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

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(2,400\times \$56.75\right)-\$480\\ =\$133,720\end{array}$ (12)

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

$\begin{array}{c}\text{Short-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(1,500\times \$40.50\text{per}\text{share}\right)+\$1,680\\ =\$62,430\end{array}$ (13)

Calculate the value of cash received from the sale of stock investment (Company W-M stocks)

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(900\times \$53.75\right)-\$1,220\\ =47,155\end{array}$ (14)

Calculate the fair value adjustment for 2017.

$\begin{array}{c}\begin{array}{l}\text{Fair value adjustment}\\ \text{for 2017}\end{array}\}\text{ = }\left(\text{Fair value}-\left[\begin{array}{l}\text{Total Purchase and sale value}\\ \text{of 2015}+\text{Purchase}-\text{Sale}\end{array}\right]+\text{Fair value of 2016}\right)\\ \text{= \$140,000}-\left[\begin{array}{l}\text{\$812,262}+\text{\$88,890}-\text{\$622,450}\\ -\text{\$143,505}+\text{\$62,430}-\text{\$46,307}\end{array}\right]+\$15,738\\ =\$140,000-\$151,320+15,738\\ =\$27,058\end{array}$ (15)