Chapter C, Problem 2PSA

1.

To determine

Financial statement analysis:

The company and its users use financial analysis as a way to analyze the company’s financial statements to make investment and business decisions. There are four financial statements that any company should produce for its users for analysis. These are the income statement, balance sheet, cash flow statement and stockholders’ equity statement.

To prepare: Journal entry to record all transactions and year-end fair value adjustment.

Explanation of Solution

Journal entries are prepared as follows:

Date	Account title and explanation	Debit ($)	Credit ($)
Year 1
Jan. 20	Debt investment − AFS	20,500
	Cash		20,500
	(to record the purchase of bond)
Feb. 9	Debt investment − AFS	55,440
	Cash		55,440
	(to record the purchase of bond)
June 12	Debt investment - AFS	40,500
	Cash		40,500
	(to record the purchase of bond)
Dec. 31	Fair value adjustment − AFS	3,910
	Unrealized gain − equity		3,910
	(to record the fair value adjustment)
Year 2
Apr. 15	Cash	23,500
	Gain on sale of debt investment		3,000
	Debt investment - AFS		20,500
	(to record the sale of bonds on cash)
July 5	Cash	35,850
	Loss on sale of debt investment	4,650
	Debt investment - AFS		40,500
	(to record the sale of bonds on cash)
July 22	Debt investment − AFS	13,500
	Cash		13,500
	(to record the purchase of notes)
Aug. 19	Debt investment − AFS	15,300
	Cash		15,300
	(to record the purchase of bonds)
Dec. 31	Fair value adjustment − AFS	1,175
	Unrealized gain − equity		1,175
	(to record the fair value adjustment)
Year 3
Feb. 27	Debt investment − AFS	160,800
	Cash		160,800
	(to record the purchase of bond)
June 21	Cash	57,600
	Gain on sale of debt investment		2,160
	Debt investment − AFS		55,440
	(to record the sale of bonds on cash)
June 30	Debt investment − AFS	50,400
	Cash		50,400
	(to record the purchase of bonds)
Aug. 3	Cash	9,750
	Loss on sale of debt investment	3,750
	Debt investment − AFS		13,500
	(to record the sale of bonds)
Nov. 1	Cash	20,475
	Gain on sale of debt investment		5,175
	Debt investment − AFS		15,300
	(to record the sale of bonds)
Dec. 31	Unrealized gain − equity	3,085
	Fair value adjustment - AFS		3,085
	(to record the fair value adjustment)

Working notes:

Year 1

Company	Cost ($)	Fair value ($)	Difference ($)
J J	20,500	21,500	1,000
S	55,440	52,500	(2,940)
M	40,500	46,350	5,850
Total	116,440	120,350	3,910

Year 2

Company	Cost ($)	Fair value ($)	Difference ($)
K	15,300	17,325	2,025
S	13,500	12,000	(1,500)
S	55,440	60,000	4,560
Total	84,240	89,325	5,085
Fair value adjustment account:
Required balance	$5,085
Existence balance	($3,910)
Required change	$1,175

Year 3

Company	Cost ($)	Fair value ($)	Difference ($)
B & D	50,400	54,600	4,200
M	160,800	158,600	(2,200)
Total	211,200	213,200	2,000
Fair value adjustment account:
Required balance	$5,085
Existence balance	($2,000)
Required change	$3,085

2.

To determine

Financial statement analysis:

The company and its users use financial analysis as a way to analyze the company’s financial statements to make investment and business decisions. There are four financial statements that any company should produce for its users for analysis. These are the income statement, balance sheet, cash flow statement and stockholders’ equity statement.

To prepare: Table showing (a) total cost (b) total fair value adjustment (c) total fair value of portfolio.

Explanation of Solution

The table is prepared as follows:

Requirement	Debt investment	Year 1 ($)	Year 2 ($)	Year 3 ($)
(a)	Long term AFS securities (cost)	116,440	84,240	211,200
(b)	Fair value adjustment − AFS	3,910	5,085	2,000
(c)	Long term AFS security (fair value)	120,350	89,325	213,200

3.

To determine

Financial statement analysis:

The company and its users use financial analysis as a way to analyze the company’s financial statements to make investment and business decisions. There are four financial statements that any company should produce for its users for analysis. These are the income statement, balance sheet, cash flow statement and stockholders’ equity statement.

To prepare:Table showing (a) realized gains or losses and (b) unrealized gains or losses.

Explanation of Solution

The table showing realized and unrealized gain or losses are prepared as follows:

Particular	Year 1 ($)	Year 2 ($)	Year 3 ($)
Realized gain or (losses)
Sale of J J		3,000
Sale of M		(4,650)
Sale of S			2,160
Sale of S L			(3,750)
Sale of K			5,175
Total realized gain or (losses)	0	(1,650)	3,585
Unrealized gains or (losses)	3,910	5,085	2,000