Chapter C, Problem 1PSB

To determine

Procedure for debiting and crediting an account:

• Increase in assets account, increase in expenses account, and decrease in liabilities account should be debited.

• Decrease in assets account, increase in revenue account, and increase in liabilities account should be credited.

All transactions affect the accounting equation that is displayed below. The accounting equation should always remain in balance at the time of recording a business transaction:

Adjusting entries:

Adjusting entries refer to those entries that are reported at the end of the year to adjust the financial position of a firm based on the accrual basis of accounting.

To prepare: The journal entries and adjusting entries, if any, to record the given transactions.

Explanation of Solution

Prepare the journal entries for the year 2015 as shown below.

Date	Particulars	L/F	Debit ($)	Credit ($)
Mar 10	Short-term investment trading securities		142,505
	Cash			142,505
	(Being short-term investment purchase against cash)
May 7	Short-term investment Trading securities		184,105
	Cash			184,105
	(Being short-term investment purchase against cash)
Sep 1	Short-term investment trading securities		69,950
	Cash			69,950
	(Being short-term investment purchase against cash)
Dec 31	Fair value adjustment short-term investment		16,560
	Unrealized gain - Income			16,560
	(Being unrealized gain earned of $16,560 at the time of closing)

Table - 1

► The short-term investment of H Company increases. The short-term investment is an asset to the company, so the current asset of H Company also increases.

► The cash account decreases by $142,505. When cash is credited it means that the current asset of the company also decreases.

► The cash account decreases by $184,105. When cash is credited it means that the current asset of the company also decreases.

► The cash account decreases by $69,950. When cash is credited it means that the current asset of the company also decreases.

► The fair value of short-term investment is $380,000 and the cost of share is $396,560. So, H Company earns an unrealized gain of $16,560, which increases the balance of income.

► The fair value adjustment account is an adjustment account recorded as an unrealized gain earned by H Company.

Now, prepare the journal entries for the year 2016.

Date	Particulars	L/F	Debit ($)	Credit ($)
April 26	Cash		170,450
	Loss on sale of short-term investment		13,655
	Short-term investment			184,105
	(Being short-term investment sold at a loss of $13,655 and receive cash )
April 27	Cash		70,812
	Gain on sale of short-term investment			862
	Short-term investment			69,950
	(Being short-term investment sold at a gain of $1,990 and receive cash )
June 2	Short-term investment trading securities		622,450
	Cash			622,450
	(Being short-term investment purchase against cash)
June 14	Short-term investment trading securities		46,307
	Cash			46,307
	(Being short-term investment purchase against cash)
Dec 31	Unrealized loss - Income		16,738
	Fair value adjustment short-term investment			16,738
	(Being unrealized loss suffered of $16,738 at the time of closing)

Table - 2

► Cash received at the time of sale of investment increases the cash balance and the asset of the company.

► On the sale of short-term investment, the short-term investment account decreases and the asset of the company also decreases by $184,105.

► At the time of sale, H Company suffers a loss on the sale of investment. This loss is debited to the loss on the sale of short-term investment account.

► On the sale of short-term investment, the short-term investment account decreases and the asset of the company also decreases by $69,950.

► The cash account decreases by $622,450. When cash is credited it means that the current asset of the company also decreases.

► The cash account decreases by $46,307. When cash is credited it means that the current asset of the company also decreases.

► The fair value of short-term investment is $828,000 and the cost of share is $811,262. So, H Company suffers an unrealized loss of $16,738, which reduces the balance of equity account.

► The fair value adjustment account is an adjustment account, recorded as an unrealized loss suffers by H Company.

Now, prepare the journal entries for the year 2017.

Date	Particulars	L/F	Debit ($)	Credit ($)
Jan 28	Short-term investment trading securities		88,890
	Cash			88,890
	(Being short-term investment purchase against cash)
Jan 31	Cash		602,760
	Loss on sale of short-term investment		19,690
	Short-term investment			622,450
	(Being short-term investment sold at a loss of $13,655 and receive cash )
Aug 22	Cash		133,720
	Loss on sale of short-term investment		8785
	Short-term investment			142,505
	(Being short-term investment sold at a loss of $13,655 and receive cash )
Sep 3	Short-term investment trading securities		62,430
	Cash			62,430
	(Being short-term investment purchase against cash)
April 27	Cash		47,155
	Gain on sale of short-term investment			848
	Short-term investment			46,307
	(Being short-term investment sold at a gain of $1,990 and receive cash )
Dec 31	Fair value adjustment short-term investment		11,320
	Unrealized gain - Income			11,320
	(Being unrealized gain earned of $11,320 at the time of closing)

Table - 3

► The short-term investment of H Company increases. The short-term investment is an asset to the company, so the current asset of H Company also increases.

► The cash account decreases by $88,890. When cash is credited it means that the current asset of the company also decreases.

► Cash received at the time of sale of investment increases the cash balance and the asset of the company.

► On the sale of short-term investment, the short-term investment account decreases and the asset of the company also decreases by $622,450.

► At the time of sale, H Company suffers a loss on the sale of investment. This loss is debited to the loss on the sale of short-term investment account.

► On the sale of short-term investment, the short-term investment account decreases and the asset of the company also decreases by $142,505.

► The cash account decreases by $62,430. When cash is credited it means that the current asset of the company also decreases.

► On the sale of short-term investment, the short-term investment account decreases and the asset of the company also decreases by $69,950.

► At the time of sale, H Company earns a gain on sale of investment. This gain is credited to the gain on sale of short-term investment account.

► The fair value of short-term investment is $140,000 and the cost of share is $151,320. So, H Company earns an unrealized gain of $11,320, which increases the balance of income.

► The fair value adjustment account is an adjustment account recorded as an unrealized gain earned by H Company.

Working notes:

1. Calculation of the value of purchase price of shares, purchased from A.

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(2,400\times \$59.15\right)+\$1,545\\ =\$141,960+\$1,545\\ =\$142,505\end{array}$

2. Calculation of the value of purchase price of shares, purchased from M.

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(5,000\times \$36.25\right)+\$2,855\\ =\$181,250+\$2,855\\ =\$184,105\end{array}$

3. Calculation of the value of purchase price of shares, purchased from U.

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,200\times \$57.25\right)+\$1,250\\ =\$68,700+\$1,250\\ =\$69,950\end{array}$

4. Calculation of fair value adjustment as on December 31, 2017.

$\begin{array}{c}\text{Fair value adjustment}=\mathrm{Cos}\text{t of share}-\text{Fair Value}\\ =\left(\$142,505+\$184,105+\$69,950\right)-\$380,000\\ =\$396,560-\$380,000\\ =\$165,60\end{array}$

5. Calculation of sale price of M shares.

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(5,000\times \$34.50\right)-\$2,050\\ =\$172,500-\$2,050\\ =\$170,450\end{array}$

6. Calculation of loss in the sale of investment of M’s shares.

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale Price}\\ =\$184,105-\$170,450\\ =\$13,655\end{array}$

7. Calculation of sale price of U’s shares.

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(1,200\times \$60.50\right)-\$1,788\\ =\$72,600-\$1,788\\ =\$70,812\end{array}$

8. Calculation of gain in the sale of investment of F Company.

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$70,812-\$69,950\\ =\$862\end{array}$

9. Calculation of the value of purchase price of shares, purchased from S.

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(3,600\times \$172\right)+\$3,250\\ =\$619,200+\$3,250\\ =\$622,450\end{array}$

10. Calculation of the value of purchase price of shares, purchased from W Mart.

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(900\times \$50.25\right)+\$1,082\\ =\$45,225+\$1,082\\ =\$46,307\end{array}$

11. Calculation of fair value adjustment as on December 31, 2018.

$\begin{array}{c}\text{Fair value adjustment}=\text{Fair Value}-\mathrm{Cos}\text{t of share}\\ =\$828,000-\left(\begin{array}{l}\$396,560-\$184,105-\$69,950\\ +\$622,450+\$46,307\end{array}\right)\\ =\$828,000-\$811,262\\ =\$16,738\end{array}$

12. Calculation of the value of purchase price of shares, purchased from P Company.

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(2,000\times \$43\right)+\$2,890\\ =\$86,000+\$2,890\\ =\$88,890\end{array}$

13. Calculation of sale price of S’s shares.

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(3,600\times \$168\right)-\$2,040\\ =\$604,800-\$2,040\\ =\$602,760\end{array}$

14. Calculation of loss in the sale of investment of S’s shares.

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale Price}\\ =\$622,450-\$602,760\\ =\$19,690\end{array}$

15. Calculation of sale price of A’s shares.

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(2,400\times \$56.75\right)-\$2,480\\ =\$136,200-\$2,480\\ =\$133,720\end{array}$

16. Calculation of loss in the sale of investment of S’s shares.

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale Price}\\ =\$142,505-\$133,720\\ =\$8,785\end{array}$

17. Calculation of the value of purchase price of shares, purchased from V Company.

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,500\times \$40.50\right)+\$1,680\\ =\$60,750+\$1,680\\ =\$62,430\end{array}$

18. Calculation of sale price of W Mart’s shares.

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(900\times \$53.75\right)-\$1,220\\ =\$48,375-\$1,220\\ =\$47,155\end{array}$

19. Calculation of gain in the sale of investment of W Mart Company.

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$47,155-\$46,307\\ =\$848\end{array}$

20. Calculation of fair value adjustment as on December 31, 2019.

$\begin{array}{c}\text{Fair value adjustment}=\mathrm{Cos}\text{t of share}-\text{Fair Value}\\ =\left[\left(\begin{array}{l}\$811,262+\$88,890-\$622,450\\ -\$142,505+\$62,430-\$46,307\end{array}\right)-\$140,000\right]\\ =\$151,320-\$140,000\\ =\$11,320\end{array}$