Chapter C, Problem 3AP

1.

To determine

Prepare journal entries to record the given transaction.

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:

Journal
Date	Account Title and Explanation	Post	Debit	Credit
		Ref.	($)	($)
January 20, 2015	Long-Term Investments-AFS (Company J&J) (1)		20,740
	Cash			20,740
	(To record the  Purchase of 1,000 shares for $20.50 per share along with a commission of $240)
February 9, 2015	Long-Term Investments—AFS (Company S) (2)		55,665
	Cash			55,665
	(To record the  Purchase of  1,200 shares for $46.20 per share along with a commission of $225)
June 12, 2015	Long-Term Investments—AFS (Company M) (3)		40,695
	Cash			40,695
	(To record the  Purchase of  1,500 shares for $27 per share along with a commission of $195)
December 31, 2015	Unrealized Loss—Equity		3,650
	Fair Value Adjustment—AFS (Company LT) (7)			3,650
	(To record the Annual adjustment to fair value of securities)
April 15, 2016	Cash (8)		22,975
	Gain on Sale of Investments			2,235
	Long-Term Investments—AFS (Company J&J)			20,740
	(To record the  sale of 1,000 shares at $23.50 per share)
July 5, 2016	Cash (9)		35,615
	Loss on Sale of Investments		5,080
	Long-Term Investments—AFS (Company M)			40,695
	(To record the  sale of 1,500 shares at $23.90 per share)
July 22, 2016	Long-Term Investments—AFS (Company SL) (10)		13,980
	Cash			13,980
	(To record the  Purchase of  600 shares for $22.50 per share along with a commission of $480)
August 19, 2016	Long-Term Investments—AFS (Company EK) (11)		15,498
	Cash			15,498
	(To record the  Purchase of  900 shares for $17 per share along with a commission of $198)
December 31, 2016	Unrealized Loss¾Equity (15)		10,168
	Fair Value Adjustment-AFS (Company LT)			10,168
	(To record the Annual adjustment to fair value of securities)
February 27. 2017	Long-Term Investments—AFS (Company M) (16)		161,325
	Cash			161,325
	(To record the  Purchase of 2,400 shares for $67 per share along with a commission of $525)
June 21, 2017	Cash  (17)		56,720
	Gain on Sale of Investments			1,055
	Long-Term Investments—AFS (Company S)			55,665
	(To record the  sale of 1,200 shares at $48 per share)
June 30, 2017	Long-Term Investments—AFS (Company B&D) (18)		50,835
	Cash			50,835
	(To record the  Purchase of 1,400 shares for $36 per share along with a commission of $435)
August 3, 2017	Cash  (19)		9,315
	Loss on Sale of Investments		4,665
	Long-Term Investments—AFS (Company SL)			13,980
	(To record the  sale of 600 shares at $16.250 per share)
November   1, 2017	Cash  (20)		19,850
	Gain on Sale of Investments			4,352
	Long-Term Investments—AFS (Company E.K)			15,498
	(To record the  sale of 900 shares at $22.75 per share)
December 31, 2017	Fair Value Adjustment—AFS (Company LT) (23)		21,858
	Unrealized Loss—Equity			13,818
	Unrealized Gain—Equity			8,040
	(To record the Annual adjustment to fair value of securities)

Table (1)

Working note:

Calculate the purchased value of long-term investment (Company J&J)

$\begin{array}{c}\text{Long-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(1,000\times \$20.50\text{per}\text{share}\right)+\$240\\ =\$20,500+\$240\\ =\$20,740\end{array}$ (1)

Calculate the purchased value of long-term investment (Company S)

$\begin{array}{c}\text{Long-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(1,200\times \$46.20\text{per}\text{share}\right)+\$225\\ =\$55,440+\$225\\ =\$55,665\end{array}$ (2)

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

$\begin{array}{c}\text{Long-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(1,500\times \$27\text{per}\text{share}\right)+\$195\\ =\$40,500+\$195\\ =\$40,695\end{array}$ (3)

Calculate the fair value adjustment for 2015.

Name of the company	Cost of long-term investment	Fair value of long-term investment	Unrealized gain or (loss)
Company J&J	$20,740 (1)	$21,500 (4)
Company S	$55,665 (2)	$45,600 (5)
Company M	$40,695 (3)	$46,350 (6)
Total	$117,100	$113,450	$3,650 (7)

Table (2)

Calculate the fair value of long-term investment of Company J&J:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(1,000\times \$21.50\text{per}\text{share}\right)\\ =\$21,500\end{array}$ (4)

Calculate the fair value of long-term investment of Company S:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(1,200\times \$38\text{per}\text{share}\right)\\ =\$45,600\end{array}$ (5)

Calculate the fair value of long-term investment of Company M:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(1,500\times \$30.90\text{per}\text{share}\right)\\ =\$46,350\end{array}$ (6)

Calculate the value of unrealized gain or loss

$\begin{array}{c}\text{Long-term investment = }\left(\text{Total Fair value }-\text{ Total cost of investment}\right)\\ =\left(\$117,100-\$113,450\right)\\ =\$3,650\end{array}$ (7)

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

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(1,000\times \$23.5\right)-\$525\\ =\$23,500-\$525\\ =\$22,975\end{array}$ (8)

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

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(1,500\times \$23.90\right)-\$235\\ =\$35,850-\$235\\ =\$35,615\end{array}$ (9)

Calculate the purchased value of long-term investment (Company SL)

$\begin{array}{c}\text{Long-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(600\times \$22.5\text{per}\text{share}\right)+\$480\\ =\$13,500+\$480\\ =\$13,980\end{array}$ (10)

Calculate the purchased value of long-term investment (Company E&D)

$\begin{array}{c}\text{Long-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(900\times \$17\text{per}\text{share}\right)+\$198\\ =\$15,300+\$480\\ =\$15,498\end{array}$ (11)

Calculate the fair value adjustment for 2016.

Name of the company	Cost of long-term investment	Fair value of long-term investment	Unrealized gain or (loss)
Company K	$15,498 (11)	$17,325 (12)
Company SL	$13,980(10)	$12,000 (13)
Company S	$55,665 (3)	$42,000 (14)
Total	$85,143	$71,325	$13,818

Table (3)

Calculate the fair value of long-term investment of Company K:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(900\times \$19.25\text{per}\text{share}\right)\\ =\$17,325\end{array}$ (12)

Calculate the fair value of long-term investment of Company SL:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(600\times \$20\text{per}\text{share}\right)\\ =\$12,000\end{array}$ (13)

Calculate the fair value of long-term investment of Company S:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(1,200\times \$35\text{per}\text{share}\right)\\ =\$42,000\end{array}$ (14)

Calculate the value of unrealized gain or loss

$\begin{array}{c}\text{Long-term investment = }\left(\begin{array}{l}\text{Total Fair value}-\text{Total}\\ \text{cost of investment}\end{array}\right)-\text{Unadjusted balance of 2015}\\ =\left(\$85,143-\$71,325\right)-\$3,650\\ =\$10,168\end{array}$ (15)

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

$\begin{array}{c}\text{Long-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(2,400\times \$67\text{per}\text{share}\right)+\$525\\ =\$160,800+\$525\\ =\$161,325\end{array}$ (16)

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

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(1,200\times \$48\right)-\$880\\ =\$57,600-\$880\\ =\$56,720\end{array}$ (17)

Calculate the purchased value of long-term investment (Company B&D)

$\begin{array}{c}\text{Long-term investment = }\left[\left(\begin{array}{l}\text{Number of shares}\\ \times \text{Price per share}\end{array}\right)+\text{Brokerage fee}\right]\\ =\left(1,400\times \$36\text{per}\text{share}\right)+\$435\\ =\$50,400+\$435\\ =\$50,835\end{array}$ (18)

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

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(600\times \$16.25\right)-\$435\\ =\$9,750-\$435\\ =\$9,315\end{array}$ (19)

Calculate the value of cash received from the sale of stock investment (Company E.K stocks)

$\begin{array}{c}\text{Cash received = }\left(\left(\begin{array}{l}\text{Number of shares sold}\\ \times \text{Sales price per share}\end{array}\right)-\text{Brokerage fees}\right)\\ =\left(900\times \$22.75\right)-\$625\\ =\$20,475-\$625\\ =\$19,850\end{array}$ (20)

Calculate the fair value adjustment for 2017.

Name of the company	Cost of long-term investment	Fair value of long-term investment	Unrealized gain or (loss)
Company B&D	$50,835 (18)	$54,600 (21)
Company SL	$161,325(16)	$165,600 (22)
Total	$212,160	$220,200	$8,040

Table (4)

Calculate the fair value of long-term investment of Company B&D:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(1,400\times \$39\text{per}\text{share}\right)\\ =\$54,600\end{array}$ (21)

Calculate the fair value of long-term investment of Company M:

$\begin{array}{c}\text{Long-term investment = }\left(\text{Number of shares}\times \text{Fair value per share}\right)\\ =\left(2,400\times \$69\text{per}\text{share}\right)\\ =\$165,600\end{array}$ (22)

Calculate the value of unrealized gain or loss:

$\begin{array}{c}\text{Long-term investment = }\left(\begin{array}{l}\text{Total Fair value}-\text{Total}\\ \text{cost of investment}\end{array}\right)+\text{Unadjusted balance of 2016}\\ =\left(\$212,160-\$220,200\right)+\$13,818\\ =\$21,858\end{array}$ (23)

2.

To determine

Prepare a table that summarizes the following

1. a. Total cost,
2. b. Total fair value adjustments,
3. c. Total fair value of the portfolio of long-term available-for-sale securities at year-end.

Explanation of Solution

Prepare a table that summarizes the total cost, total fair value adjustments, and the total fair value as follows:

Particulars	December 31, 2015	December 31, 2016	December 31, 2017
a. Long-Term AFS Securities (cost)	$117,100	$85,143	$212,160
b. Fair Value Adjustment	-3,650	-13,818	8,040
c. Long-Term AFS Securities (fair value)	$113,450	$71,325	$220,200

Table (5)

3.

To determine

Prepare a table that summarizes the following

1. a. The realized gains and losses,
2. b. The unrealized gains and losses for the portfolio of long-term available-for-sale securities at year-end.

Explanation of Solution

1. a. Prepare a table that summarizes the realized gains and losses as follows:

Particulars	2015	2016	2017
Realized gains (losses)
Sale of J & J shares		$2,235
Sale of M shares		(5,080)
Sale of SL shares			($4,665)
Sale of S shares			1,055
Sale of E.K shares			4,352
Total realized gain (loss)	$0	($2,845)	$742

Table (6)

1. b. Prepare a table that summarizes the Unrealized gains and losses as follows

Particulars	2015	2016	2017
Unrealized gains (losses) at year-end	($3,650)	($13,818)	$8,040

 Table (7)