Rose Company had no short-term investments prior to this year. It had the following transactions this year involving short-term stock investments with insignificant influence.
Required
- 1. Prepare
journal entries to record the preceding transactions and events. - 2. Prepare a table to compare the year-end cost and fair values of Rose’s short-term stock investments. The year-end fair values per share are Gem Co., $26; PepsiCo, $46; and Xerox, $13.
- 3. Prepare an
adjusting entry to record the year-end fair value adjustment for the portfolio of short-term stock investments.
Analysis Component
- 4. Explain the
balance sheet presentation of the fair value adjustment for Rose's short-term investments. - 5. How do these short-term stock investments affect Rose’s (a) income statement for this year and (b) the equity section of its balance sheet at this year-end?
1.
Prepare the journal entries to record the given transactions.
Explanation of Solution
Journal entry:
Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Prepare the journal entries to record the given transactions as follows:
Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
April 16, | Stock Investments in company G (1) | 84,000 | ||
Cash | 84,000 | |||
(To record the Purchase of 4,000 shares of Company G in cash) | ||||
July 7, | Stock Investments in Company P (2) | 98,000 | ||
Cash | 98,000 | |||
(To record 2,000 shares of company P purchased in cash) | ||||
July 20, | Stock Investments in company X (3) | 16,000 | ||
Cash | 16,000 | |||
(To record 1,000 shares of Company X purchased in cash) | ||||
August 15, | Cash | 3,500 | ||
Dividend Revenue (4) | 3,500 | |||
(To record dividend revenue received in cash) | ||||
August 28, | Cash (5) | 60,000 | ||
Stock Investments in Company G (6) | 48,000 | |||
Gain on Sale of Stock Investments (7) | 12,000 | |||
(To record sales made 2,000 shares at the rate of $30 per share) | ||||
October 1, | Cash | 5,000 | ||
Dividend Revenue (8) | 5,000 | |||
(To record dividend revenue received in cash) | ||||
December 1, | Cash | 1,500 | ||
Dividend Revenue (9) | 1,500 | |||
(To record dividend revenue received in cash) | ||||
December 31, | Cash | 3,000 | ||
Dividend Revenue (10) | 3,000 | |||
(To record dividend revenue received in cash) |
Table (1)
Working note:
Calculate the purchased value of stock investment (Company G)
Calculate the purchased value of stock investment (Company P)
Calculate the purchased value of stock investment (Company X)
Calculate the dividend revenue received from Company G
Calculate the value of cash received from the sale of stock investment (Company G stocks)
Calculate the purchase value of long-term investment for 2,000 shares of Company G
Calculate the gain (loss) from sale of stock investment.
Calculate the dividend revenue received from Company P
Calculate the dividend revenue received from Company G
Calculate the dividend revenue received from Company X
2.
Prepare a table to compare the year-end cost and fair value of Company R’s stock investments in available-for sale securities.
Explanation of Solution
Prepare a table to compare the year-end cost and fair value of Company R’s stock investments in available-for sale securities as follows:
Name of the company | Cost of short-term investment | Fair value of short-term investment | Unrealized gain or (loss) |
Company G | $36,000 (12) | $39,000 (13) | |
Company P | $98,00 (2) | $92,000 (14) | |
Company X | $16,000 (3) | $13,000 (15) | |
Totals | $150,000 | $144,000 | $(6,000) (15) |
Table (2)
Working note:
Calculate the cost of stock investment of Company G
Calculate the fair value of stock investment of Company G
Calculate the fair value of stock investment of Company P
Calculate the fair value of stock investment of Company X
Calculate the value of unrealized gain or loss
3.
Prepare an adjusting entry, if necessary, to record the year-end fair value adjustment for the portfolio of stock investments in available-for-sale securities.
Explanation of Solution
Adjusting entries:
Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle. The purpose of adjusting entries is to adjust the revenue, and expenses during the period in which they actually occurs.
Prepare an adjusting entry, if necessary, to record the year-end fair value adjustment for the portfolio of stock investments in available-for-sale securities as follows:
Adjusting entry for unrealized loss:
Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) |
December, 31 | Unrealized loss - Equity | 6,000 | ||
Fair value adjustment | 6,000 | |||
(To record the adjustment entry for unrealized loss at the end of the accounting year ) |
Table (3)
- Unrealized Loss–Equity is an adjustment account to report the investment at fair market value. Since loss has occurred while adjusting; therefore, debit the unrealized Gain or Loss–Equity account with $6,000.
- Fair Value Adjustment is a contra-asset account. The account shows a credit balance since the market price has decreased (loss); therefore, credit the fair value adjustment with $6,000.
4.
Explain the manner in which the fair value adjustment of Company R’s stock investment is presented in the balance sheet.
Explanation of Solution
Explain the manner in which the fair value adjustment of Company R’s stock investment is presented in the balance sheet as follows:
Cost of stock investment in available-for-sale securities of $150,000 is reported in the assets side of the balance sheet and unrealized loss of $6,000 is subtracted from the cost of investment for the fair value adjustment. Net fair value of $144,000
5.
Explain the manner in which the stock investments affect company R’s
- a. Income statement for the year, and
- b. The equity section of the balance sheet at year ended.
Explanation of Solution
Explain the manner in which the stock investments affect company R’s income statement for the year, and the equity section of the balance sheet at year ended as follows:
(a) Income statement:
- Unrealized loss-Interest Revenue, $6,000
- Dividend Revenue, $13,000 (17)
- Gain on Sale of Stock Investments, $12,000
- Net effect on income is $19,000
(b) Equity section of Balance sheet:
- Increase to equity from the $19,000 increase in income
Working note:
Calculate the value of total dividend revenue received:
Want to see more full solutions like this?
Chapter 15 Solutions
Principles of Financial Accounting.
- Carlsville Company began operations in the current year and had no prior stock investments. The following transactions are from its short-term stock investments with insignificant influence. Prepare journal entries to record these transactions. On December 31, prepare the adjusting entry to record the fair value adjustment for the portfolio of stock investments. July 22 Purchased 1,600 shares of Hunt Corp. at $30 per share. Sep. 5 Received a $2 cash dividend for each share of Hunt Corp. Sep. 27 Purchased 3,400 shares of HCA at $34 per share. Oct. 3 Sold 1,600 shares of Hunt at $25 per share. Oct. 30 Purchased 1,200 shares of Black & Decker at $50 per share. Dec. 17 Received a $3 cash dividend for each share of Black & Decker. Dec. 31 Fair value of the short-term stock investments is $180,000.arrow_forwardOn May 1, Republic Corporation purchased 400 shares of stock for P114 per share and held it as FVTPL financial assets. The price decreased to P106 per share on August 1 and then increased to P122 on December 31. During the year, the company received dividends of P3.50 per share. At what amount should the investment be valued in the December 31 balance sheet?arrow_forwardGympa reported on its income statement a net income $647,000 for the year ended December 31 before considering the following: a. During the year, Gympa purchased trading securities b. At year-end , the fair value of the investment portfolio was $50,000 lesshan the cost c. The balance of Retained Earnings was $792,000 on January 1 d. Gympa paid $67,000 in cash dividends during the year. Using the above data, calculate the balance of Retained Earnings on Decemeber 31.arrow_forward
- The income statement for Hudson Company reported net income of $345,000 for the year ended December 31 before considering the following: During the year, the company purchased trading securities. At year-end, the fair value of the investment portfolio was $23,000 less than cost. The balance of Retained Earnings was $823,000 on January 1. Hudson Company paid $43,000 in cash dividends during the year.Compute the balance of Retained Earnings on December 31.$ fill in the blank 1arrow_forwardCarlsville Company began operations in the current year and had no prior stock investments. The following transactions are from its short-term stock investments with insignificant influence. Prepare journal entries to record these transactions. On December 31, prepare the adjusting entry to record the fair value adjustment for the portfolio of stock investments. July 22 Purchased 1,600 shares of Hunt Corporation at $22 per share. September 5 Received a $2 cash dividend for each share of Hunt Corporation. September 27 Purchased 3,300 shares of HCA at $25 per share. October 3 Sold 1,600 shares of Hunt at $17 per share. October 30 Purchased 1,500 shares of Black & Decker at $53 per share. December 17 Received a $3 cash dividend for each share of Black & Decker. December 31 Fair value of the short-term stock investments is $167,000.=arrow_forwardRecord the appropriate journal entry to reflect the following: The investments that Veggies-R-Us. Inc. currently has in their investment account (current asset) represents investments that were purchased recently. Based upon stock market auotes obtained for December 31, 20XX, the market value of these investments = $112,000. (It is management's intent to actively manage these shares for profit.) You have been provided with the partial Trail Balance for this company below: Veggies-R-Us. Trial Balance (Partial) December 31, 20XX Cash $26,750 (Debit) Accounts Receivable $47,630 (Debit) Allowance for doubtful accounts $250 (Debit) Prepaid rent $1,680 (Debit) Supplies $8,700 (Debit) Investments $113,520 (Debit) Furniture $15,350 (Debit)arrow_forward
- The income statement for Dodson Corporation reported net income of $22,400 for the year ended December 31 before considering the following: During the year the company purchased available-for-sale securities. At year end, the fair value of the investment portfolio was $2,100 more than cost. The balance of Retained Earnings was $83,000 on January 1. . Dodson Corporation paid $9,000 in cash dividends during the year. Calculate the balance of Retained Earnings on December 31. 51,600arrow_forwardBased on the following infromation what would the general journal entries look like, BGJ Corporation had no short-term investments prior to this year. It had the following transactions this year involving short-term stock investments with insignificant influence. April 16 Purchased 4,500 shares of OnPoint Company stock at $30 per share. July 7 Purchased 3,000 shares of Eco Company stock at $55 per share. July 20 Purchased 1,400 shares of Lafayette Company stock at $22 per share. August 15 Received an $1.10 per share cash dividend on the OnPoint Company stock. August 28 Sold 2,700 shares of OnPoint Company stock at $33 per share. October 1 Received a $5.20 per share cash dividend on the Eco Company shares. December 15 Received a $1.30 per share cash dividend on the remaining OnPoint Company shares. December 31 Received a $4.60 per share cash dividend on the Eco Company shares.arrow_forwardFor several years Fister Links Products has held shares of Microsoft common stock, considered by the company to be securities available-for-sale. The shares were acquired at a cost of $500,000. Their fair value last year was $610,000 and is $670,000 this year. At what amount will the investment be reported in this year’s balance sheet? What adjusting entry is required to accomplish this objective?arrow_forward
- Sycip was tasked to analyze the earnings performance of Alamo Transport Corporation. The following data were gathered from Alamo's financial statements and from a report of the closing market prices of shares: Profit for 2020 6,643,000 Preference dividends declared during 2020 600,000 Ordinary dividends declared Dec 31, 2020 2,620,000 Number of Alamo ordinary shares outstanding: 01-Jan-20 1,500,000shares 31-Dec-20 1,600,000shares Market price per ordinary share on Dec 31, 150 2015 Calculate the following ratios relating to the Alamo share: 1. Basic earnings per ordinary share 2. Price-earnings ratio Iarrow_forward[The following information applies to the questions displayed below.] Rose Company had no short-term investments prior to this year. It had the following transactions this year involving short- term stock investments with insignificant influence. April 16 Purchased 3,500 shares of Gem Company stock at $24 per share. Purchased 2,000 shares of PepsiCo stock at $49 per share. July 7 July 20 Purchased 1,000 shares of Xerox stock at $16 per share. August 15 Received a $1.00 per share cash dividend on the Gem Company stock. August 28 Sold 2,000 shares of Gem Company stock at $30 per share. October 1 Received a $2.50 per share cash dividend on the PepsiCo shares. December 15 Received a $1.00 per share cash dividend on the remaining Gem Company shares. December 31 Received a $1.50 per share cash dividend on the PepsiCo shares. The year-end fair values per share are Gem Company, $26; PepsiCo, $46; and Xerox, $13. 4. Prepare the current asset section of the balance sheet for the fair value…arrow_forward[The following information applies to the questions displayed below.] Rose Company had no short-term investments prior to this year. It had the following transactions this year involving short- term stock investments with insignificant influence. April 16 Purchased 8,000 shares of Gem Company stock at $21.25 per share. July 7 Purchased 4,000 shares of PepsiCo stock at $50.00 per share. July 20 Purchased 2,000 shares of Xerox stock at $15.00 per share. August 15 Received a $0.85 per share cash dividend on the Gem Company stock. August 28 Sold 4,000 shares of Gem Company stock at $28.00 per share. October 1 Received a $2.00 per share cash dividend on the PepsiCo shares. December 15 Received a $1.00 per share cash dividend on the remaining Gem Company shares. December 31 Received a $1.25 per share cash dividend on the PepsiCo shares. The year-end fair values per share are Gem Company, $23.50; PepsiCo, $47.25; and Xerox, $12.00. Problem 15-4A (Algo) Part 2 2. Prepare a table to compare the…arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education