
Journal is the primary record of the business transaction in chronological (date wise) order. Journal Entry contains two effects one is debit and other is credit, under double entry book keeping system.
Adjusting entries are made at the end of the year to adjust the financial position of the enterprise according to accrual basis of accounting.
Long Term Investment:
Long term investment is the investment for long period generally for more than one year. The long term investment helps in the purchase of fixed assets, expansion, or for growth of the company. It shows under assets head of the
Part 1
1.
To prepare: Journal entries to record the transactions.

Explanation of Solution
For the year 2017,
To record purchase of B l common stock
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
Jan 5 | Long term investment Trading securities | 200,500 | ||
Cash | 200,500 | |||
(Being long term investment purchase against cash) | ||||
Table (1) |
- The long term investment of B Company is increase. The long term investment is the asset of the company and the asset of B Company also increases.
- The cash account is decrease by $200,500, and the credit of cash means that the current asset of the company also decreases.
To record dividend received in cash from B l.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
August 1 | Cash | 21,000 | ||
Long term investment | 21,000 | |||
(Being cash dividend received) | ||||
Table (2) |
- Cash account debit as cash is received from B l Company as cash dividend,
- As per equity method the dividend amount is credited to the long term investment account.
To record closing entry as on December 31, 2017
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
December 31 | Long term investment | 20,500 | ||
Earnings from long term investment | 20,500 | |||
(Being equity in investee earning recorded) | ||||
Table (3) |
- The long term investment is increase by $20,500 because of the dividend calculation as on December 31, 2017.
- Earnings from long term investment account are link with the net income, if this account is credited the net income of B Company increases.
For the year 2018,
To record dividend received in cash from B l.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
August 1 | Cash | 27,000 | ||
Long term investment | 27,000 | |||
(Being cash dividend received) | ||||
Table (4) |
- Cash account debit as cash is received from B l Company as cash dividend.
- As per equity method the dividend amount is credited to the long term investment account.
To record closing entry as on December 31, 2018
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
Dec 31 | Long term investment | 19,500 | ||
Earnings from long term investment | 19,500 | |||
(Being equity in investee earning recorded) | ||||
Table (5) |
- The long term investment is increase by $19,500 because of the dividend calculation as on December 31, 2017.
- Earnings from long term investment account are link with the net income, if this account is credited the net income of B Company increases.
For the year 2019,
To record sale of B l stock
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
January 8 | Cash | 375,000 | ||
Gain on sale of long term investment | 182,500 | |||
Long term investment | 192,500 | |||
(Being long term investment sold at a gain of $154,000 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 $192,500 amount.
- At the time of sale B Company receives the gain on sale of investment and this gain is credited to the gain on sale of long term investment account.
Working notes:
Calculation of cash dividend of B l Company,
Calculation of amount of dividend as on December 31, 2017,
Calculation of cash dividend of B l Company,
Calculation of amount of dividend as on December 31, 2018,
Calculation of value of B l stock,
Calculation of Gain in the sale of investment of K Company
2.
To compute: Carrying book value per share of B Company investment in B l common stock.
2.

Explanation of Solution
Calculated values,
Carrying value as on sale of date is $192,500.
Number of share is 20,000.
Formula to calculate carrying value per share is,
Substitute $ 192,500 for carrying value and 20,000 for number of share in the above equation.
Working notes:
Statement showing carrying book value of B l common stock
Particulars | Amount ($) | |||
Actual cost | 200,500 | |||
Less: Dividend 2017 | 21,000 | |||
Add: Earning in 2017 | 20,500 | |||
Less: Dividend 2018 | 27,000 | |||
Add: Earning in 2018 | 19,500 | |||
Carrying value as on sale of date | 192,500 | |||
Table (7) |
Thus, carrying value per share is $29.
3.
To compute: The net increase or decrease in S Company equity.
3.

Explanation of Solution
Statement shows increase or decrease in the amount of equity of B Company,
Particulars | Amount ($) | |||
Earning from B l in 2017 | 20,500 | |||
Earning from B l in 2018 | 19,500 | |||
Gain on sale of investment | 182,500 | |||
Net increase in equity | 222,500 | |||
Table (8) |
Thus, increase in equity is $222,500.
Part 2
1.
To prepare: Journal entries when the investment is available for sale security.
Part 2
1.

Explanation of Solution
For the year 2017,
To record purchase of B l common stock
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
Jan 5 | Long term investment Trading securities | 200,500 | ||
Cash | 200,500 | |||
(Being long term investment purchase against cash) | ||||
Table (9) |
- The long term investment of B Company is increase. The long term investment is the asset of the company and the asset of B Company also increases.
- The cash account is decrease by $200,500, and the credit of cash means that the current asset of the company also decreases.
To record dividend received in cash from B l.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
August 1 | Cash | 21,000 | ||
Long term investment | 21,000 | |||
(Being cash dividend received) | ||||
Table (10) |
- Cash account debit as cash is received from B l Company as cash dividend,
- As per equity method the dividend amount is credited to the long term investment account.
To record the unrealized gain occurs on December 31, 2017.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
December 31 | Fair value adjustment long term investment | 37,500 | ||
Unrealized gain- Equity | 37,500 | |||
(Being unrealized gain earned of $37,500 at the time of closing) | ||||
Table (11) |
- The fair value adjustment account is an adjustment account to account for the unrealized gain earn by B Company.
- The fair value of long term investment is less than the cost of share so the S Company earn an unrealized gain of $37,500, and unrealized gain increases the balance of income.
For the year 2018,
To record dividend received in cash from B l.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
August 1 | Cash | 27,000 | ||
Long term investment | 27,000 | |||
(Being cash dividend received) | ||||
Table (12) |
- Cash account debit as cash is received from B l Company as cash dividend,
- As per equity method the dividend amount is credited to the long term investment account.
To record the unrealized gain occurs on December 31, 2018.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
December 31 | Fair value adjustment long term investment | 35,000 | ||
Unrealized gain- Equity | 35,000 | |||
(Being unrealized gain earned of $35,000 at the time of closing) | ||||
Table (13) |
- The fair value adjustment account is an adjustment account to account for the unrealized gain earn by B Company.
- The fair value of long term investment is less than the cost of share so the S Company earn an unrealized gain of $35,000, and unrealized gain increases the balance of income.
For the year 2019,
To record sale of B l stock
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
January 8 | Cash | 375,000 | ||
Gain on sale of long term investment | 174,500 | |||
Long term investment | 200,500 | |||
(Being long term investment sold at a gain of $154,000 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 $200,500 amount.
- At the time of sale B Company receives the gain on sale of investment and this gain is credited to the gain on sale of long term investment account.
To record the unrealized gain occurs on December 31, 2019.
Date | Account Title and Explanation | Post ref | Debit ($) | Credit ($) |
December 31 | Fair value adjustment long term investment | 72,500 | ||
Unrealized gain- Equity | 72,500 | |||
(Being unrealized gain earned of $72,500 at the time of closing) | ||||
Table (15) |
- The fair value adjustment account is an adjustment account to account for the unrealized gain earn by B Company.
- The fair value of long term investment is less than the cost of share so the S Company earn an unrealized gain of $72,500, and unrealized gain increases the balance of income.
Working notes:
Calculation of cash dividend of B l Company,
Calculation of fair value of shares as on December 31, 2017
Calculation of fair value adjustment as on December 31, 2017,
Calculation of cash dividend of B l Company,
Calculation of fair value of shares as on December 31, 2018,
Calculation of fair value adjustment as on December 31, 2018,
Determine the unadjusted amount that has to be adjusted,
Calculation of Gain in the sale of investment of K Company,
2.
To compute: Carrying book value per share of B Company investment in B l common stock.
2.

Explanation of Solution
Calculated values,
Carrying value as on sale of date is $200,500.
Number of share is 20,000.
Formula to calculate carrying value per share is,
Substitute $ 200,500 for carrying value and 20,000 for number of share in the above equation.
Thus, carrying value per share is $10.03.
3.
To compute: The net increase or decrease in B Company equity.
3.

Explanation of Solution
Statement shows increase or decrease in the amount of equity of B Company,
Particulars | Amount ($) | |||
Earning from B in 2017 | 21,000 | |||
Earning from B in 2018 | 27,000 | |||
Gain on sale of investment | 174,500 | |||
Net increase in equity | 222,500 | |||
Table (16) |
Thus, increase in equity is $222,500.
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Chapter C Solutions
FINANCIAL & MANAGERIAL ACCOUNTING
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