FINANCIAL ACCOUNTING FUND. W/CONNECT
FINANCIAL ACCOUNTING FUND. W/CONNECT
5th Edition
ISBN: 9781259693168
Author: Wild
Publisher: MCG
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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.

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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:

DateAccount Titles and DescriptionPost Ref. Debit ($) Credit ($)
March 10, 2015Short-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, 2015Short-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, 2015Short-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, 2015Unrealized gain 17,560
       Fair value adjustment-company ST(4) 17,560
  (To record the  fair value of securities) 
     
April 26, 2016Cash (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, 2016Cash (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, 2016Short-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, 2016Short-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, 2016Fair value adjustment-company ST ($15,738+$17,560) (9) 33,298
 Unrealized Gain 33,298
  (To record the  fair value of securities) 
     
January 28, 2017Short-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, 2017Cash (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, 2017Cash (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, 2017Short-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, 2017Cash (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, 2017Unrealized 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)

Short-term investment = [(Number of shares×Price per share)+Brokerage fee]=(2,400×$59.15pershare)+$1,545=$143,505 (1)

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

Short-term investment = [(Number of shares×Price per share)+Brokerage fee]=(5,000×$36.25pershare)+$2,855=$184,105 (2)

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

Short-term investment = [(Number of shares×Price per share)+Brokerage fee]=(1,200×$57.25pershare)+$1,250=$69,950 (3)

Calculate the fair value adjustment for 2015.

Unrealized Gain or(loss)} = Fair valueToatl Purchase cost= $380,000$143,505+$184,105+$69,950=$17,560 (4)

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

Cash received = ((Number of shares sold×Sales price per share)Brokerage fees)=(5,000×$34.50)$2,050=$170,450 (5)

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

Cash received = ((Number of shares sold×Sales price per share)Brokerage fees)=(1,200×$60.50)$1,788=$70,812 (6)

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

Short-term investment = [(Number of shares×Price per share)+Brokerage fee]=(3,600×$172pershare)+$3,250=$622,450 (7)

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

Short-term investment = [(Number of shares×Price per share)+Brokerage fee]=(900×$50.25pershare)+$1,082=$46,307 (8)

Calculate the fair value adjustment for 2016.

Fair value adjustmentfor 2016} = (Fair value[Total Purchase cost of 2015Sale+TotalPurchase cost of 2016])= $828,000[$397,560$184,105$69,950+622,450+$46,307]=$828,000$812,262=$15,738 (9)

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

Short-term investment = [(Number of shares×Price per share)+Brokerage fee]=(2,000×$43pershare)+$2,890=$88,890 (10)

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

Cash received = ((Number of shares sold×Sales price per share)Brokerage fees)=(3,600×$168)$2,040=$602,760 (11)

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

Cash received = ((Number of shares sold×Sales price per share)Brokerage fees)=(2,400×$56.75)$480=$133,720 (12)

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

Short-term investment = [(Number of shares×Price per share)+Brokerage fee]=(1,500×$40.50pershare)+$1,680=$62,430 (13)

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

Cash received = ((Number of shares sold×Sales price per share)Brokerage fees)=(900×$53.75)$1,220=47,155 (14)

Calculate the fair value adjustment for 2017.

Fair value adjustmentfor 2017} = (Fair value[Total Purchase and sale valueof 2015+PurchaseSale]+Fair value of 2016)= $140,000[$812,262+$88,890$622,450$143,505+$62,430$46,307]+$15,738=$140,000$151,320+15,738=$27,058 (15)

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