Chapter C, Problem 3PSB

1.

To determine

To prepare: Journal entries to record the transactions.

Explanation of Solution

For the year 2017,

To record purchase of 1,200 shares of ACompany at $25.50 per share plus $800 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
March 10	Long term investment Trading securities		31,400
	Cash			31,400
	(Being long term investment purchase against cash)

Table(1)

• The long term investment of P Company is increase. The long term investment is the asset of the company and the current asset of P Company also increases.
• The cash account is decrease by $31,400, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 2,500 shares of F Company at $22.50 per share plus $1,033 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
April 7	Long term investment Trading securities		57,233
	Cash			57,233
	(Being long term investment purchase against cash)

Table(2)

• The long term investment of P Company is increase. The long term investment is the asset of the company and the current asset of P Company also increases.
• The cash account is decrease by $57,233, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 600 shares of P O Company at $47 per share plus $890 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
September 1	Long term investment Trading securities		29,090
	Cash			29,090
	(Being long term investment purchase against cash)

Table(3)

• The long term investment of P Company is increase. The long term investment is the asset of the company and the current asset of P Company also increases.
• The cash account is decrease by $29,090, 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	Fair value adjustment long term investment		2,823
	Unrealized gain			2,823
	(Being unrealized gain earned of $2,823 at the time of closing)

Table(4)

• The fair value adjustment account is an adjustment account to account for the unrealized gain earn by P Company.
• The fair value of long term investment is less than the cost of share so the P Company earn an unrealized gain of $2,823, and unrealized gain increases the balance of income.

For the year 2018,

To record sale of 2,500 share of F Company at $20.50 and commission is $1,207.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
April 26	Cash		50,043
	Loss on sale of long term investment		7,190
	Long term investment			57,233
	(Being long term investment sold at a loss 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 $57,233 amount.
• At the time of sale P Company receives the loss on sale of investment and this loss is debited to the loss on sale of long term investment account.

To record purchase of 1,800 shares of D Company at $19.25 per share plus $1,050 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
June 2	Long term investment Trading securities		35,700
	Cash			35,700
	(Being long term investment purchase against cash)

Table(6)

• The long term investment of P Company is increase. The long term investment is the asset of the company and the current asset of P Company also increases.
• The cash account is decrease by $35,700, and the credit of cash means that the current asset of the company also decreases.

To record purchase of 1,200 shares of S Company at $21 per share plus $280 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
June 14	Long term investment Trading securities		25,480
	Cash			25,480
	(Being long term investment purchase against cash)

Table(7)

• The long term investment of P Company is increase. The long term investment is the asset of the company and the current asset of P Company also increases.
• The cash account is decrease by $25,480, and the credit of cash means that the current asset of the company also decreases.

To record sale of 600 share of P O Company at $51 and commission is $845.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
November 27	Cash		29.755
	Gain on sale of long term investment			665
	Long term investment			29,090
	(Being long term investment sold at a gain of $665 and receive cash )

Table(8)

• 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 $29,090 amount.
• At the time of sale P 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, 2018.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31	Unrealized loss		2,220
	Fair value adjustment long term investment			2,220
	(Being unrealized loss suffered of $2,220 at the time of closing)

Table(9)

• The fair value adjustment account is an adjustment account to account for the unrealized gain earn by P Company.
• The fair value of long term investment is more than the cost of share so the P Company suffer an unrealized loss of $2,220, and unrealized loss decreases the balance of income.

For the year 2019,

To record purchase of 1,000 shares of C Company at $40 per share plus $1,480 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
January 28	Long term investment Trading securities		41,480
	Cash			41,480
	(Being long term investment purchase against cash)

Table(10)

• The long term investment of P Company is increase. The long term investment is the asset of the company and the current asset of P Company also increases.
• The cash account is decrease by $41,480, and the credit of cash means that the current asset of the company also decreases.

To record sale of 1,200 share of A Company at $21.50 and commission is $1,850.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
August 22	Cash		23,950
	Loss on sale of long term investment		7,450
	Long term investment			31,400
	(Being long term investment sold at a loss of $599 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 $57,233 amount.
• At the time of sale P Company receives the loss on sale of investment and this loss is debited to the loss on sale of long term investment account.

To record purchase of 3,000 shares of M Company at $28 per share plus $780 as commission

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
September 3	Long term investment Trading securities		84,780
	Cash			84,780
	(Being long term investment purchase against cash)

Table(12)

• The long term investment of P Company is increase. The long term investment is the asset of the company and the current asset of P Company also increases.
• The cash account is decrease by $84,780, 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 $24 and commission is $599.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
October9	Cash		28,201
	Gain on sale of long term investment			2,721
	Long term investment			25,480
	(Being long term investment sold at a gain of $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 $25,480 amount.
• At the time of sale P 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 1,800 share of D Company at $15 and commission is $898.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
October. 31	Cash		26,102
	Loss on sale of long term investment		9,598
	Long term investment			35,700
	(Being long term investment sold at a loss of $599 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 $35,700 amount.
• At the time of sale P Company receives the loss on sale of investment and this loss is debited to the loss on sale of long term investment account.

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

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
December 31	Fair value adjustment long term investment		6,260
	Unrealized gain			6,260
	(Being unrealized gain earned of $2,823 at the time of closing)

Table(15)

• The fair value adjustment account is an adjustment account to account for the unrealized gain earn by P Company.
• The fair value of long term investment is less than the cost of share so the P Company earn an unrealized gain of $6,260, and unrealized gain increases the balance of income.

Working notes:

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

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,200\times \$25.50\right)+\$800\\ =\$30,600+\$800\\ =\$31,400\end{array}$

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

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(2,500\times \$22.50\right)+\$1,033\\ =\$56,250+\$1,033\\ =\$57,283\end{array}$

Calculation of the value of purchase price of shares, P O Company,

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(600\times \$47\right)+\$890\\ =\$28,200+\$890\\ =\$29,090\end{array}$

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

$\begin{array}{c}\text{Fair value adjustment}=\mathrm{Cos}\text{t of share}-\left(\text{Fair Value}\times \text{Share}\right)\\ =\left[\begin{array}{l}\left(\$31,400+\$57,233+\$29,090\right)-\\ \left(1,200\times 27.50+2,500\times 21+600\times 49\right)\end{array}\right]\\ =\$117,723-\$114,900\\ =\$2,823\end{array}$

Calculation of sale price of shares of F Company,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(2,500\times \$20.50\right)-\$1,207\\ =\$51,250-\$1,207\\ =\$50,043\end{array}$

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

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale price}\\ =\$57,233-\$50,043\\ =\$7,190\end{array}$

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

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,800\times \$19.25\right)+\$1,050\\ =\$34,650+\$1,050\\ =\$35,700\end{array}$

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

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,200\times \$21\right)+\$280\\ =\$25,200+\$280\\ =\$25,480\end{array}$

Calculation of sale price of shares of P O Company,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(600\times \$51\right)-\$845\\ =\$30,600-\$845\\ =\$29,755\end{array}$

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

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$29,755-\$29,090\\ =\$665\end{array}$

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

$\begin{array}{c}\text{Fair value adjustment}=\left(\text{Fair Value}\times \text{Share}\right)-\mathrm{Cos}\text{t of share}\\ =\left[\begin{array}{l}\left(1,200\times 29+1,800\times 18+1,200\times 23\right)-\\ \left(\$31,400+\$35,700+\$25,480\right)\end{array}\right]\\ =\$94,800-\$92,580\\ =\$2,220\end{array}$

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

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(1,000\times \$40\right)+\$1,480\\ =\$40,000+\$1,480\\ =\$41,480\end{array}$

Calculation of sale price of shares of A Company,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(1,200\times \$21.50\right)-\$1,850\\ =\$25,800-\$1,850\\ =\$23,950\end{array}$

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

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale price}\\ =\$31,400-\$23,950\\ =\$7,450\end{array}$

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

$\begin{array}{c}\text{Purchase price of shares}=\left(\text{Number of shares}\times \text{share price}\right)+\text{Commision}\\ \text{=}\left(3,000\times \$28\right)+\$780\\ =\$84,000+\$780\\ =\$84,780\end{array}$

Calculation of sale price of shares of S Company,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(1,200\times \$24\right)-\$599\\ =\$28,800-\$599\\ =\$28,201\end{array}$

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

$\begin{array}{c}\text{Gain}=\text{Sale Price}-\text{Cost of short term investment}\\ =\$28,201-\$25,480\\ =\$2,721\end{array}$

Calculation of sale price of shares of D Company,

$\begin{array}{c}\text{Sale price of shares}=\left(\text{Number of shares}\times \text{share price}\right)-\text{Broker fee}\\ \text{=}\left(1,800\times \$15\right)-\$898\\ =\$27,000-\$898\\ =\$26,102\end{array}$

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

$\begin{array}{c}\text{Loss}=\text{Cost of short term investment}-\text{Sale price}\\ =\$35,700-\$26,102\\ =\$9,598\end{array}$

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

$\begin{array}{c}\text{Fair value adjustment}=\mathrm{Cos}\text{t of share}-\left(\text{Fair Value}\times \text{Share}\right)\\ =\left[\begin{array}{l}\left(\$41,480+\$84,780\right)-\\ \left(1,000\times 48+3,000\times 24\right)\end{array}\right]\\ =\$126,260-\$120,000\\ =\$6,260\end{array}$

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	A	31,400
	F	57,233
	P	29,090
2018	A	31,400
	D	35,700
	S	25,480
2019	C	41,480
	M	84,780

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	A	33,000
	F	52,500
	P	29,400
2018	A	34,800
	D	32,400
	S	27,600
2019	C	48,000
	M	72,000

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	117,723	114,900	2,823
2018	92,580	94,800	2,220
2019	126,260	120,000	6,260

Table(18)

3.

(a)

To determine

To prepare: A table that shows realized gain or loss on sale of long term investment.

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 ($) $\left(\text{A}-\text{B}\right)$
2,500 shares of FCompany	50,043	57,233	(7,190)
600 shares ofP O Company	29,755	29,090	665
1,200 shares ofA Company	23,950	31,400	(7,450)
1,200 shares ofS Company	28,201	25,480	2,721
1,800 shares ofD Company	26,102	35,700	(9,598)
			(20,852)

Table(19)

Thus, total amount of loss is $20,852 this should be reported in income statement.