Chapter C, Problem 3PSB

1.

To determine

To prepare:

The journal entries to record the transactions and any year-end fair value adjustments to the portfolio of long-term available-for-sale securities.

Answer to Problem 3PSB

Solution:

Prepare the journal entries for the year 2015 as shown below.

Journal entries of P Company For the year 2015
Date	Particulars	L/F	Debit ($)	Credit ($)
March 10	Long term investment trading securities		31,400
	Cash			31,400
	(Being long term investment purchase against cash)
April 7	Long term investment trading securities		57,233
	Cash			57,233
	(Being long term investment purchase against cash)
September 1	Long term investment trading securities		29,090
	Cash			29,090
	(Being long term investment purchase against cash)
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 – 1

Explanation of Solution

► The long-term investment of P Company increases. The long-term investment is an asset of the company, so the current asset of the company also increases.

► The cash account decreases by $31,400. So, cash account is credited which means that the current asset of the company also decreases.

► The cash account decreases by $57,233. So, cash account is credited which means that the current asset of the company also decreases.

► The cash account decreases by $29,090. So, cash account is credited which means that the current asset of the company also decreases.

► The fair value adjustment account is an adjustment account recorded as an unrealized gain earned by the company.

► The fair value of the long-term investment is less than the cost of share. So, the company earns an unrealized gain of $2,823

Now, prepare the journal entries for the year 2016 as shown below.

Journal entries of P Company For the year 2016
Date	Particulars	L/F	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 gain and receive cash )
June 2	Long term investment trading securities		35,700
	Cash			35,700
	(Being long term investment purchase against cash)
June 14	Long term investment trading securities		25,480
	Cash			25,480
	(Being long term investment purchase against cash)
Nov 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 and receive cash )
Dec 31	Unrealized loss		2,220
	Fair value adjustment long term investment			2,220
	(Being unrealized loss suffered at the time of closing)

Table - 2

► Cash received at the time of sale of investment increases the cash balance and the value of assets of the company.

► On the sale of short-term investment, the short-term investment account decreases and the asset of the company also decreases by $57,233.

► On the time of sale, P Company earns a gain on the sale of investment. This gain is credited to the gain on sale of long-term investment account.

► The long-term investment of P Company increases. The long-term investment is an asset to the company, so the current asset of the company also increases.

► The cash account decreases by $35,700. The credit of the cash account means that the current asset of the company also decreases.

► The cash account decreases by $25,480. The credit of the cash account means that the current asset of the company also decreases.

► The fair value adjustment account is an adjustment account reported as an unrealized gain earned by the company.

► The fair value of long term investment is less than the cost of share. So, the company earns an unrealized gain of $2,220, which increases the balance of income.

Now, prepare the journal entries for the year 2017 as shown below.

Journal entries of P Company For the year 2017
Date	Particulars	L/F	Debit ($)	Credit ($)
Jan 28	Long term investment trading securities		41,480
	Cash			41,480
	(Being long term investment purchase against cash)
Aug 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 )
Sept 3	Long term investment Trading securities		84,780
	Cash			84,780
	(Being long term investment purchase against cash)
Oct 9	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 )
Oct 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 )
Dec 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 - 3

► The long-term investment of P Company increases. The long-term investment is an asset to the company, so the current asset of the company also increases.

► The cash account decreases by $41,480. The credit of the cash account means that the current asset of the company also decreases.

► Cash received at the time of sale of investment increases the cash balance and the value of assets of the company.

► On the sale of short-term investment, the short-term investment account decreases and the asset of the company also decreases by $57,233.

► On the time of sale, P Company earns a gain on the sale of investment. This gain is credited to the gain on sale of long-term investment account.

► The cash account decreases by $84,780. The credit of the cash account means that the current asset of the company also decreases.

► On the sale of short-term investment, the short-term investment account decreases and the asset of the company also decreases by $25,480.

► On the sale of short-term investment, the long-term investment account decreases and the asset of the company also decreases by $35,700.

► The fair value adjustment account is an adjustment account recorded as an unrealized loss suffered by the company.

► The fair value of long term investment is less than the cost of share. So, P Company earns an unrealized gain of $6,260, which increases the balance of income.

Working notes:

1. Calculation of the value of purchase price of shares of A Company.

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

2. Calculation of the value of purchase price of shares of F Company.

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

3. Calculation of the value of purchase price of shares of P O Company.

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

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

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

5. Calculation of sale price of shares of F Company.

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

6. Calculation of loss in the sale of investment of F Company.

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

7. Calculation of the value of purchase price of shares of D Company.

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

8. Calculation of the value of purchase price of shares of S Company.

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

9. Calculation of sale price of shares of P O Company,

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

10. Calculation of gain in the sale of investment of J Company.

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

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

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

12. Calculation of the value of purchase price of shares of C Company.

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

13. Calculation of sale price of shares of A Company.

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

14. Calculation of loss in the sale of investment of A Company.

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

15. Calculation of the value of purchase price of shares of M Company.

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

16. Calculation of sale price of shares of S Company.

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

17. Calculation of gain in the sale of investment of S Company.

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

18. Calculation of sale price of shares of D Company.

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

19. Calculation of loss in the sale of investment of D Company.

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

20. 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 summarizing the total cost for the years 2015, 2016, and 2017.

Explanation of Solution

Prepare the table summarizing the total cost as shown below.

Year	Company	Cost of security ($)
2015	A	31,400
	F	57,233
	P	29,090
2016	A	31,400
	D	35,700
	S	25,480
2017	C	41,480
	M	84,780

Table – 4

(b)

To determine

To prepare:

A table summarizing the total fair value adjustment for the years 2015, 2016, and 2017.

Explanation of Solution

Prepare the table summarizing the total fair value adjustment as shown below.

Year	Company	Fair value ($)
2015	A	33,000
	F	52,500
	P	29,400
2016	A	34,800
	D	32,400
	S	27,600
2017	C	48,000
	M	72,000

Table - 5

(c)

To determine

To prepare:

A table summarizing the total fair value for the portfolio of long-term available-for-sale securities for the years 2015, 2016, and 2017.

Explanation of Solution

Prepare the table summarizing the total fair value as shown below.

Year	Cost value ($) (A)	Fair value ($) (B)	Fair value adjustment ($)$\left(\text{A}-\text{B}\right)$
2015	117,723	114,900	2,823
2016	92,580	94,800	2,220
2017	126,260	120,000	6,260

Table – 6

Conclusion

Hence, the required tables for (a), (b), and (c) are prepared as above.

3.

To determine

To prepare:

A table summarizing the realized gain or loss.

Explanation of Solution

Prepare the table summarizing the realized gain or loss as shown below.

Particulars	Sale proceeds ($) (A)	Cost ($) (B)	Gain/loss ($) $\left(\text{A}-\text{B}\right)$
2,500 shares of F Company	50,043	57,233	(7,190)
600 shares of P O Company	29,755	29,090	665
1,200 shares of A Company	23,950	31,400	(7,450)
1,200 shares of S Company	28,201	25,480	2,721
1,800 shares of D Company	26,102	35,700	(9,598)
			(20,852)

Table – 7

Therefore, the total amount of loss of $20,852 is to be reported in the income statement.