1.
Prepare the journal entries to record the given transactions.
1.

Explanation of Solution
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 ($) | Credit ($) |
April 16, 2015 | Short-Term Investments in company G (1) | 97,180 | ||
Cash | 97,180 | |||
(To record the Purchase of 4,000 shares of Company G in cash) | ||||
May 1, 2015 | Short-Term Investments in T-bills | 100,000 | ||
Cash | 100,000 | |||
(To record the Country U Treasury bills purchased in cash) | ||||
July 7, 2015 | Short-Term Investments in Company P (2) | 98,675 | ||
Cash | 98,675 | |||
(To record 2,000 shares of company P purchased in cash) | ||||
July 20, 2015 | Short-Term Investments in company X (3) | 16,955 | ||
Cash | 16,955 | |||
(To record 1,000 shares of Company X purchased in cash) | ||||
August 1, 2015 | Cash | 101,500 | ||
Short-Term Investments in T-bills | 100,000 | |||
Interest Revenue (4) | 1,500 | |||
(To record principle and interest received for Country U Treasury bills) | ||||
August 15, 2015 | Cash | 3,400 | ||
Dividend Revenue (5) | 3,400 | |||
(To record dividend revenue received in cash) | ||||
August 28, 2015 | Cash (6) | 59,775 | ||
Short-Term Investments in Company G (7) | 48,590 | |||
Gain on Sale of Short-Term Investments (8) | 11,185 | |||
(To record sales made 2,000 shares at the rate of $30 per share) | ||||
October 1, 2015 | Cash | 3,800 | ||
Dividend Revenue (9) | 3,800 | |||
(To record dividend revenue received in cash) | ||||
December 1, 2015 | Cash | 2,100 | ||
Dividend Revenue (10) | 2,100 | |||
(To record dividend revenue received in cash) | ||||
December 31, 2015 | Cash | 2,600 | ||
Dividend Revenue (11) | 2,600 | |||
(To record dividend revenue received in cash) |
Table (1)
Working note:
Calculate the purchased value of short-term investment (Company G)
Calculate the purchased value of short-term investment (Company P)
Calculate the purchased value of short-term investment (Company X)
Calculate the interest revenue from treasury bills
Calculate the dividend revenue received from Company G
Calculate the value of cash received from the sale of stock investment (Company G stocks)
Calculate the purchase value of long-term investment for 2,000 shares of Company G
Calculate the gain (loss) from sale of stock investment.
Calculate the dividend revenue received from Company P
Calculate the dividend revenue received from Company G
Calculate the dividend revenue received from Company X
2.
Prepare a table to compare the year-end cost and fair value of Company R’s short-term investments in available-for sale securities.
2.

Explanation of Solution
Prepare a table to compare the year-end cost and fair value of Company R’s short-term investments in available-for sale securities as follows:
Name of the company | Cost of short-term investment | Fair value of short-term investment | Unrealized gain or (loss) |
Company G | $48,590 (7) | $53,000 (12) | |
Company P | $98,675 (2) | $93,000 (13) | |
Company X | $16,955 (3) | $13,750 (14) | |
Totals | $164,220 | $159,750 | $(4,470) (15) |
Table (2)
Working note:
Calculate the fair value of short-term investment of Company G
Calculate the fair value of short-term investment of Company P
Calculate the fair value of short-term investment of Company X
Calculate the value of unrealized gain or loss
3.
Prepare an adjusting entry, if necessary, to record the year-end fair value adjustment for the portfolio of short-term investments in available-for-sale securities.
3.

Explanation of Solution
Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle. The purpose of adjusting entries is to adjust the revenue, and expenses during the period in which they actually occurs.
Prepare an adjusting entry, if necessary, to record the year-end fair value adjustment for the portfolio of short-term investments in available-for-sale securities as follows:
Adjusting entry for unrealized loss:
Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
December, 31 | Unrealized loss - Equity | 4,470 | ||
Fair value adjustment | 4,470 | |||
(To record the adjustment entry for unrealized loss at the end of the accounting year ) |
Table (3)
- Unrealized Loss–Equity is an adjustment account to report the investment at fair market value. Since loss has occurred while adjusting; therefore, debit the unrealized Gain or Loss–Equity account with $4,470.
- Fair Value Adjustment is a contra-asset account. The account shows a credit balance since the market price has decreased (loss); therefore, credit the fair value adjustment with $4,470.
4.
Explain the manner in which the fair value adjustment of Company R’s short-term investment is presented in the
4.

Explanation of Solution
Explain the manner in which the fair value adjustment of Company R’s short-term investment is presented in the balance sheet as follows:
Cost of short-term investment in available-for-sale securities of $164,220 is reported in the assets side of the balance sheet and unrealized loss of $4,470 is subtracted from the cost of investment for the fair value adjustment. Net fair value of $159,750
5.
Explain the manner in which the short-term investments affect company R’s (a) income statement for the year 2015, and (b) the equity section of the balance sheet at year ended 2015.
5.

Explanation of Solution
Explain the manner in which the short-term investments affect company R’s (a) income statement for the year 2015, and (b) the equity section of the balance sheet at year ended 2015 as follows:
(a)Income statement
- Interest Revenue, $1,500
- Dividend Revenue, $11,900 (16)
- Gain on Sale of Short-Term Investments, $11,185
- Net effect on income is $24,585
(b)Equity section of Balance sheet
- Subtraction from equity due to the Unrealized Loss, $4,470
- Increase to equity from the $24,585 increase in income
- Net effect on equity is $20,115
Working note:
Calculate the value of total dividend revenue received
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Chapter C Solutions
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