Chapter D, Problem D.1BP

(1)

To determine

Investment:

It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

To record: each of these investment transactions.

Answer to Problem D.1BP

Prepare the journal entries for each of these transactions.

Date	Account title and explanation	Post ref.	Debit $	Credit $
February 2	Investments		52,500
	Cash			52,500
	(To record the purchase of common stock)
February 4	Investments		19,200
	Cash			19,200
	(To record the purchase of preferred stock)
July 15	Cash		16,000
	Investments			14,000
	Gain (difference amount)			2,000
	(To record the sale of common stock)
November  30	Cash		2,290
	Dividend revenue			2,290
	(To record the dividend revenue)
December 31	Unrealized Holding gain (other comprehensive income)		5,600
	Investments			5,600
	(To record the adjusted fair value of the common and preferred stock)

Table (1)

Explanation of Solution

Common stocked purchased:

• Investments are the assets. Purchase of the common stock increases the investments. Thus, investments are debited with $52,500 $\left(1,500\text{shares}\times \text{\$35}\text{per share}\right)$.
• Cash is a current asset. Purchase of common stock decreases the cash balance. Thus, cash is credited with $52,500.

Purchase of preferred stock:

• Investments are the assets. Purchase of the common stock increases the investments. Thus, investments are debited with $19,200 $\left(600\text{shares}\times \text{\$32}\text{per share}\right)$.
• Cash is a current asset. Purchase of common stock decreases the cash balance. Thus, cash is credited with $19,200.

Common stock sold @ $40 per share:

• Cash is a current asset. Sale of common stock increases the cash balance. Thus, cash is debited with $16,000 $\left(400\text{shares}\times \text{\$40}\text{per share}\right)$.
• Investments are the assets. Sale of the common stock decreases the investments. Thus, investments are credited with $14,000 $\left(400\text{shares}\times \text{\$35}\text{per share}\right)$.
• Gain is a component of owners’ equity. Loss decreases the owners’ equity. Thus, gain is credited with $2,000.

Dividend received:

• Cash is a current asset. Dividend revenue increases the cash balance. Thus, cash is debited with $2,290 $\left[\left(1,100\text{shares}\times \text{\$1}\text{.1}\text{per share}\right)+\left(600\text{shares}\times \text{\$1}\text{.8}\text{per share}\right)\right]$.
• Dividend revenue is a component of owners’ equity. Dividend revenue increases the owners’ equity. Thus, dividend revenue is credited with $2,290.

Fair value adjustment:

• Investments are the assets. Changes (increase) in the fair value of the common stock and preferred stock increases the investments. Thus, investments are debited with $5,600 $\left[\left(1,100\text{shares}\times \text{\$}\left(35-31\right)\text{per share}\right)+\left(600\text{shares}\times \text{\$}\left(32-30\right)\text{per share}\right)\right]$.
• Unrealized Holding gain is a component of other comprehensive income. It increases the balance of the other comprehensive income. Thus, unrealized Holding gain (other comprehensive income) is credited with $5,600 $\left[\$4,400+\$1,200\right]$.

(2)

To determine

Investment:

It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

To calculate: the balance in the Investments account as of December 31.

Answer to Problem D.1BP

The balance in the investment account as of December 31 is $52,100 $\left(\$34,100+\$18,000\right)$.

Explanation of Solution

Calculate the balance in the investment account as of December 31.

Particulars	Common stock	Preferred stock
Investments purchased	$52,500	$19,200
Less: sale of common stock	(14,000)
Less: fair value adjustment	(4,400)	(1,200)
Investments as of December 31	34,100	18,000
Number of shares	1,100shares	600 shares

Table (2)