Chapter C, Problem 3PSA

1.

To determine

To prepare: Journal entries to record the transactions.

Explanation of Solution

For the year 2017,

To record purchase of 1,000 shares of J company at $20.50 per share plus $240 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan 20, 2017	Long term investment Trading securities		20,740
	Cash			20,740
	(Being long term investment purchase against cash)

Table(1)

• The long term investment of G Company is increase. The long term investment is the asset of the company and the current asset of G Company also increases.
• The cash account is decrease by $20,740, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 1,200 shares of SCompany at $46.20 per share plus $225 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Feb 09, 2017	Long term investment Trading securities		55,665
	Cash			55,665
	(Being long term investment purchase against cash)

Table(2)

• The long term investment of G Company is increase. The long term investment is the asset of the company and the current asset of G Company also increases.
• The cash account is decrease by $55,665, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 1,500 shares of MCompany at $27 per share plus $195 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
June 12, 2017	Long term investment Trading securities		40,695
	Cash			40,695
	(Being long term investment purchase against cash)

Table(3)

• The long term investment of G Company is increase. The long term investment is the asset of the company and the current asset of G Company also increases.
• The cash account is decrease by $40,695, and the credit of cash means that the current asset of the company also decreases.

To record the unrealized gain occurs on December 31, 2017.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31, 2017	Fair value adjustment long term investment		11,228
	Unrealized gain			11,228
	(Being unrealized gainearned of $11,228 at the time of closing)

Table(4)

• The fair value adjustment account is an adjustment account to account for the unrealized gain earn by G Company.
• The fair value of long term investment is less than the cost of share so the G Company earn an unrealized gain of $11,228, and unrealized gainincreases the balance of income.

For the year 2018,

To record sale of 1,000 share of J Company at $23.50 and commission is $525.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
April 15 2018	Cash		23,248
	Gain on sale of long term investment			2,508
	Long term investment			20,740
	(Being long term investment sold at a gain of $1,990 and receive cash )

Table(5)

• 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 $20,740 amount.
• At the time of sale G Company receives the gain on sale of investment and this gain is credited to the gain on sale of long term investment account.

To record sale of 1,500 share of M Company at $23.90 and commission is $235.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
July. 5 2018	Cash		35,615
	Loss on sale of long term investment		5,080
	Long term investment			40,695
	(Being long term investment sold at a loss of $599 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 $40,695 amount.
• At the time of sale C 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 600 shares of S.L at $22.50 per share plus $480 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
June 22, 2018	Long term investment Trading securities		13,980
	Cash			13,980
	(Being long term investment purchase against cash)

Table(7)

• The long term investment of G Company is increase. The long term investment is the asset of the company and the current asset of G Company also increases.
• The cash account is decrease by $13,980, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 900 shares of E.K at $17 per share plus $198 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
August 19,2018	Long term investment Trading securities		15,498
	Cash			15,498
	(Being long term investment purchase against cash)

Table(8)

• The long term investment of G Company is increase. The long term investment is the asset of the company and the current asset of G Company also increases.
• The cash account is decrease by $15,498, and the credit of cash means that the current asset of the company also decreases.

To record the unrealized gain occurs on December 31, 2018.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31, 2018	Fair value adjustment long term investment		21,396
	Unrealized gain			21,396
	(Being unrealized gain earned of at the time of closing)

Table(9)

• The fair value adjustment account is an adjustment account to account for the unrealized gain earn by G Company.
• The fair value of long term investment is less than the cost of share so the G Company earn an unrealized gain of $21,396, and unrealized gain increases the balance of income.

For the year 2019,

To record purchase of 2,400 shares of Mi at $67 per share plus $525 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Feb. 27, 2019	Long term investment Trading securities		161,325
	Cash			161,325
	(Being long term investment purchase against cash)

Table(10)

• The long term investment of G Company is increase. The long term investment is the asset of the company and the current asset of G Company also increases.
• The cash account is decrease by $161,325, and the credit of cash means that the current asset of the company also decreases.

To record sale of 1,200 share of S Company at $48 and commission is $880.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
June 21 2019	Cash		56,720
	Gain on sale of long term investment			1,055
	Long term investment			55,665
	(Being long term investment sold at a gain of $1,055 and receive cash )

Table(11)

• 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 $55,665 amount.
• At the time of sale G Company receives the gain on sale of investment and this gain is credited to the gain on sale of long term investment account.

To record purchase of 1,400 shares of B&D at $36 per share plus $4355 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
June.30, 2019	Long term investment Trading securities		50,835
	Cash			50,835
	(Being long term investment purchase against cash)

Table(12)

• The long term investment of G Company is increase. The long term investment is the asset of the company and the current asset of G Company also increases.
• The cash account is decrease by $50,835, and the credit of cash means that the current asset of the company also decreases.

To record sale of 600 share of S.L Company at $16.25 and commission is $435.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
August 3, 2019	Cash		9,315
	Loss on sale of long term investment		4,665
	Long term investment			13,980
	(Being long term investment sold at a loss of $4,665 and receive cash )

Table(13)

• 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 $13,980 amount.
• At the time of sale C 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 sale of 900 share of E.K at $22.75 and commission is $625.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
June 21 2019	Cash		19,850
	Gain on sale of long term investment			4,352
	Long term investment			15,498
	(Being long term investment sold at a gain of $4,352 and receive cash )

Table(14)

• 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 $55,665 amount.
• At the time of sale G Company receives the gain on sale of investment and this gain is credited to the gain on sale of long term investment account.

To record the unrealized loss occurs on December 31, 2019.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31, 2019	Unrealized loss- Income		462
	Fair value adjustment Short term investment			462
	(Being unrealized loss suffered of $462 at the time of closing)

Table(15)

• The fair value of short term investment is $220,200 and the cost of share is $ 219,738 so the G Company suffers an unrealized loss of $462, and unrealized loss reduces the balance of equity account.
• The fair value adjustment account is an adjustment account to account for the unrealized loss suffers by G Company.

Working Notes:

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

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,000\times \$20.50\right)+\$240\\ =\$20,500+\$240\\ =\$20,740\end{array}$

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

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,200\times \$46.20\right)+\$225\\ =\$55,440+\$225\\ =\$55,665\end{array}$

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

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,500\times \$27\right)+\$195\\ =\$40,500+\$195\\ =\$406,95\end{array}$

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

$\begin{array}{c}\text{Fair value adjustment}=\mathrm{Cos}\text{t of share}-\left(\text{Fair Value}\times \text{Share}\right)\\ =\left[\begin{array}{l}\left(\$20,925+5,825+97,928\right)-\\ \left(1,000\times 21.50+1,200\times 38+1,500\times 30.90\right)\end{array}\right]\\ =\$124,678-\left(\$21,500+\$45,600+\$46,350\right)\\ =\$124,678-\$113,450\\ =\$11,228\end{array}$

Calculation of sale price of shares of J Company,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(1,000\times \$23.50\right)-\$525\\ =\$23,500-\$525\\ =\$23,248\end{array}$

Calculation of Gain in the sale of investment of J Company,

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$23,248-\$20,740\\ =\$2,508\end{array}$

Calculation of sale price of shares of J Company,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(1,500\times \$23.90\right)-\$235\\ =\$35,850-\$235\\ =\$35,615\end{array}$

Calculation of loss in the sale of investment of H Company,

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale price}\\ =\$40,695-\$35,615\\ =\$5,080\end{array}$

Calculation of the value of purchase price of shares of S.L Company,

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(600\times \$22.50\right)+\$480\\ =\$13,500+\$480\\ =\$13,980\end{array}$

Calculation of the value of purchase price of shares of E.K Company,

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(900\times \$17\right)+\$198\\ =\$15,300+\$198\\ =\$15,498\end{array}$

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

$\begin{array}{c}\text{Fair value adjustment}=\mathrm{Cos}\text{t of share}-\left(\text{Fair Value}\times \text{Share}\right)\\ =\left[\begin{array}{l}\left(\$124,678-\$20,740-\$40,695+\$13,980+\$15,498\right)-\\ \left(900\times \$19.25+600\times \$20+1,200\times \$35\right)\end{array}\right]\\ =\$92,721-\left(\$17,325+\$12,000+\$42,000\right)\\ =\$92,721-\$71,325\\ =\$21,396\end{array}$

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

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(2,400\times \$67\right)+\$525\\ =\$160,800+\$525\\ =\$161,325\end{array}$

Calculation of sale price of shares of S Company,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(1,200\times \$48\right)-\$880\\ =\$57,600-\$880\\ =\$56,720\end{array}$

Calculation of Gain in the sale of investment of S Company,

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$56,720-\$55,665\\ =\$1,055\end{array}$

Calculation of the value of purchase price of shares of B&D Company,

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,400\times \$36\right)+\$435\\ =\$50,400+\$435\\ =\$50,835\end{array}$

Calculation of sale price of shares of S.L Company,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(600\times \$16.25\right)-\$435\\ =\$9,750-\$435\\ =\$9,315\end{array}$

Calculation of loss in the sale of investment of S.L Company,

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale price}\\ =\$13,980-\$9,315\\ =\$4,665\end{array}$

Calculation of sale price of shares of E.K Company,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(900\times \$22.75\right)-\$625\\ =\$20,475-\$625\\ =\$19,850\end{array}$

Calculation of Gain in the sale of investment of E.K Company,

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$19,850-\$15,498\\ =\$4,352\end{array}$

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

$\begin{array}{c}\text{Fair value adjustment}=\left(\text{Fair Value}\times \text{Share}\right)-\text{Cost of share}\\ =\left[\begin{array}{l}\left(1,400\times \$39+2,400\times \$69\right)\\ -\left(\begin{array}{l}\$92,721+\$161,325-\$55,665\\ +\$50,835-\$13,980-\$15,498\end{array}\right)\end{array}\right]\\ =\left[\left(\$54,600+\$165,600\right)-\$219,738\right]\\ =\$220,200-\$219,738\\ =\$462\end{array}$

2.

(a)

To determine

To prepare: A table that shows the cost of security in each year.

Explanation of Solution

A table that shows cost of security is,

Year	Company	Cost of security ($)
2017	J	20,740
	S	55,665
	M	40,695
2018	S.L	13,980
	E.K	15,498
	S	55,665
2019	Mi	161,325
	B&D	50,835

Table(16)

(b)

To determine

To prepare: A table that shows the fair value of security in each year.

Explanation of Solution

A table that shows fair value of security is,

Year	Company	Fair Value ($)
2017	J	21,500
	S	45,600
	M	46,350
2018	S.L	12,000
	E.K	17,325
	S	42,000
2019	Mi	165,600
	B&D	54,600

Table(17)

(c)

To determine

To prepare: A table that shows the total fair value portfolio of security in each year.

Explanation of Solution

A table shows total fair value portfolio of security,

Year	Cost Value ($) (A)	Fair Value ($) (B)	Fair Value Adjustment ($) $\left(\text{A}-\text{B}\right)$
2017	124,678	113,450	11,228
2018	92,721	71,325	21,396
2019	219,738	220,200	(462)

Table(18)

3.

(a)

To determine

To prepare: A table that shows realized gain or loss.

Explanation of Solution

Statement shows the net gain or loss realized on sale of available for sale security.

Particulars	Sale proceeds ($) (A)	Cost ($) (B)	Gain/loss ($) $\left(\text{A}-\text{B}\right)$
1,000 shares of J Company	23,248	20,740	2,508
1,500 shares of M Company	35,615	40,695	(5,080)
1,200 shares of S Company	56,720	55,665	1,055
600 shares of S.L Company	9,315	13,980	(4,665)
900 shares of E.K Company	19,850	15,498	4,352
			(1,830)

Table(19)

Thus, total amount of loss is $1,830 this should be reported in income statement.

(b)

To determine

To prepare: A table that shows unrealized gain or loss from the portfolio of long term investment

Explanation of Solution

Company	Fair Value ($) (A)	Cost of Security ($) (B)	Unrealized gain /loss ($) $\left(\text{A}-\text{B}\right)$
J	20,740	21,500	(760)
S	55,665	45,600	10,065
M	40,695	46,350	(5,655)
S.L	13,980	12,000	(1,980)
E.K	15,498	17,325	(1,827)
Mi	165,600	161,325	4,275
B&D	54,600	50,835	3,765
			7,883

Table(20)

Thus, the total unrealized gain is $7,883.