Chapter C, Problem 2GLP

To determine

Journal Entry:

Journal is the primary record of the business transaction in chronological (date wise) order. Journal Entry contains two effects one is debit and other is credit, under double entry book keeping system.

Adjusting Entries:

Adjusting entries are made at the end of the year to adjust the financial position of the enterprise according to accrual basis of accounting.

To prepare: Journal entries to record the transactions of year 2017

Explanation of Solution

To record sale of 3,500 share of B common stock at $79,188 and brokerage fee is $1500.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
January 29	Cash		77,688
	Loss on sale of long term investment		2,002
	Long term investment			79,690
	(Being long term investment sold at a loss of $599 and receive cash )

      Table (1)

• Cash receive at the time of sale of investment it increases the cash balance and the asset of the company also increases.
• By the sale of long term investment, the long term investment account decreases and the asset of the company also decreases with $79,690 amount.
• At the time of sale S Company suffer a loss on sale of investment and this loss is debited to the loss on sale of long term investment account.

To record purchase of 10,000 shares of W common stock at $197,500 plus $240 as brokerage fee

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
April 17	Long term investment Trading securities		199,900
	Cash			199,900
	(Being long term investment purchase against cash)

      Table (2)

• The long term investment of S Company is increase. The long term investment is the asset of the company and the current asset of S Company also increases.
• The cash account is decrease by $199,900, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 4,500 shares of X common stock at $126,562 plus $1,750 as brokerage fee

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 6	Long term investment Trading securities		128,312
	Cash			128,312
	(Being long term investment purchase against cash)

      Table (3)

• The long term investment of S Company is increase. The long term investment is the asset of the company and the current asset of S Company also increases.
• The cash account is decrease by $128,312, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 50,000 shares of Y common stock at $375,000 plus $1,200 as brokerage fee

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
August 22	Long term investment Trading securities		376,200
	Cash			376,200
	(Being long term investment purchase against cash)

      Table (4)

• The long term investment of S Company is increase. The long term investment is the asset of the company and the current asset of S Company also increases.
• The cash account is decrease by $376,200, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 8,500 shares of Z common stock at $267,900 plus $2,450 as brokerage fee

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
November 13	Long term investment Trading securities		270,350
	Cash			270,350
	(Being long term investment purchase against cash)

      Table (5)

• The long term investment of S Company is increase. The long term investment is the asset of the company and the current asset of S Company also increases.
• The cash account is decrease by $270,350, and the credit of cash means that the current asset of the company also decreases.

To record sale of 40,000 share of A Common stock at $515,000 and brokerage fee is $4,100.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
December 9	Cash		510,900
	Loss on sale of long term investment		24,400
	Long term investment			535,300
	(Being long term investment sold at a loss of $24,400 and receive cash )

      Table (6)

• Cash receive at the time of sale of investment it increases the cash balance and the asset of the company also increases.
• By the sale of long term investment, the long term investment account decreases and the asset of the company also decreases with $24,400 amount.
• At the time of sale S Company suffer a loss on sale of investment and this loss is debited to the loss on sale of long term investment account.

To record unrealized loss,

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
December 31	Unrealized loss- Income		27,988
	Fair value adjustment Short term investment			27,988
	(Being unrealized loss suffered of $27,988 at the time of closing)

      Table (7)

• There is an unrealized loss while calculating the year end adjustment. Unrealized loss account debited it reduces the net income.
• The fair value adjustment account is an adjustment account to account for the unrealized loss suffers by S Company.

Working notes:

Calculation of cost of share of B common stock sold,

  $\begin{array}{c}\text{Cost value of share}=\text{Cost of shares}\times \frac{\text{Number of share }}{\text{Total shares}}\\ =\$159,380\times \frac{3,500}{7,000}\\ =\$79,690\end{array}$

Calculation of sale price of B common stock share that sold, given in question,

  $\begin{array}{c}\text{Sale Price}=\$79,188-\$1,500\\ =\$77,688\end{array}$

Calculation of loss in sale of shares,

  $\begin{array}{c}\text{Loss}=\text{Cost of shares}-\text{Fair value of shares}\\ =\$79,690-\$79,188\\ =\$2,002\end{array}$

Calculation of the value of purchase price of shares, W common stock,

  $\begin{array}{c}\text{Purchase price of shares}=\text{Value of security}+\text{Brokerage}\\ \text{=\$197,500}+\$2,400\\ =\$199,900\end{array}$

Calculation of the value of purchase price of shares, X Company,

  $\begin{array}{c}\text{Purchase price of shares}=\text{Value of security}+\text{Brokerage}\\ \text{=\$126,562}+\$1,750\\ =\$128,312\end{array}$

Calculation of the value of purchase price of shares, Y Company,

  $\begin{array}{c}\text{Purchase price of shares}=\text{Value of security}+\text{Brokerage}\\ \text{=\$375,000}+\$1,200\\ =\$376,200\end{array}$

Calculation of the value of purchase price of shares, Z Company,

  $\begin{array}{c}\text{Purchase price of shares}=\text{Value of security}+\text{Brokerage}\\ \text{=\$267,900}+\$2,450\\ =\$270,350\end{array}$

Calculation of sale price of A Company share that sold, given in question,

  $\begin{array}{c}\text{Sale Price}=\$515,000-\$4,100\\ =\$510,900\end{array}$

Calculation of loss in sale of shares,

  $\begin{array}{c}\text{Loss}=\text{Cost of shares}-\text{Fair value of shares}\\ =\$535,300-\$510,900\\ =\$24,400\end{array}$

Prepare a statement that shows security wise adjustment.

Company	Numberof shares	Fair valueonDecember 31,2016 ($)(A)	Cost of purchase of new security($)(A)	Fair valueonDecember 31,2017 ($)(B)	Unrealized gain/loss($)$\left(\text{B}-\text{A}\right)$
B	3,500	77,000		81,375	4,375
C	17,500	640,938		610,312	(30,626)
X	4,500		128,312	118,125	(10,187)
Z	8,500		270,350	278,800	8,450
		717,938	398,662	1,088,612	(27,988)

      Table (8)