Concept explainers
(a)
Debt investments: It refers to the investments made in debts by the investor for which it lends funds to the borrowing company at a predetermined interest and the debt amount is repaid on the maturity date. For example, corporate bonds, government bonds, certificate of deposits.
Stock Investments: It refers to the investment in a financial instrument known as stock that, gives the right of ownership to an investor equal to the amount invested in the company. Thus, it enables a stockholder to claim in the profits and the assets of the company.
To Record: The transactions and post to the accounts Debt Investments and Stock Investments.
(a)
Explanation of Solution
Journalize the investments transactions for Company N.
Record the purchase entry of stock investment.
Date | Accounts and Description | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
February | 1 | Stock Investments | 51,600 | ||
Cash | 51,600 | ||||
(To record the purchase of stock of Company L) |
Table (1)
Description:
- Stock Investments is an asset account. The amount has increased due to purchase of stock investment; therefore, debit Stock Investments account with $51,600.
- Cash is an asset account. The amount has decreased because the stock investment is purchased for cash; therefore, credit Cash account with $51,600.
Record the purchase entry of stock investment.
Date | Accounts and Description | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
March | 1 | Stock Investments | 18,500 | ||
Cash | 18,500 | ||||
(To record the purchase of stock of Company NC) |
Table (2)
Description:
- Stock Investments is an asset account. The amount has increased due to purchase of stock investment; therefore, debit Stock Investments account with $18,500.
- Cash is an asset account. The amount has decreased because the stock investment is purchased for cash; therefore, credit Cash account with $18,500.
Record the purchase entry of debt investment.
Date | Accounts and Description | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
April | 1 | Debt Investments | 70,000 | ||
Cash | 70,000 | ||||
(To record the purchase of debt investments) |
Table (3)
Description:
- Debt Investments is an asset account. The amount has increased due to purchase of stock investment; therefore, debit Debt Investments account with $70,000.
- Cash is an asset account. The amount has decreased because the debt investment is purchased for cash; therefore, credit Cash account with $70,000.
Record the receipt entry of dividend on stock investment.
Date | Accounts and Description | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
July | 1 | Cash | 960 | ||
Dividend Revenue | 960 (1) | ||||
(To record receipt of dividend on stock investments) |
Table (4)
Working Note:
Compute amount of dividend received on Company L’s stock.
Description:
- Cash is an asset account. The amount has increased because interest is received; therefore, debit Cash account with $960.
- Dividend Revenue is a revenue account. Revenue increases
stockholders’ equity account. Therefore, credit Dividend Revenue account with $960.
Record the sale entry of stock investment.
Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
August | 1 | Cash | 8,400 | ||
Loss on Sale of Stock Investments | 200 (3) | ||||
Stock Investments | 8,600 (2) | ||||
(To record the sale of stock investment) |
Table (5)
Working Notes:
Compute cost of stock investment sold.
Compute realized gain (loss) on sale of stock.
Description:
- Cash is an asset account. The amount has increased because the asset is disposed and cash is received; therefore, debit Cash account with $8,400.
- Loss on Sale of Stock Investments is an equity account. Since loss has occurred from disposal, the Equity is decreased; therefore, debit Loss on Sale of Stock Investments account with $200.
- Stock Investments is an asset account. The amount has decreased because the asset is disposed; therefore, credit Stock Investments account with $8,600.
Record the receipt entry of dividend on stock investment.
Date | Accounts and Description | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
September | 1 | Cash | 1,000 | ||
Dividend Revenue | 1,000 (4) | ||||
(To record receipt of dividend on stock investments) |
Table (6)
Working Note:
Compute amount of dividend received on Company NC’s stock.
Description:
- Cash is an asset account. The amount has increased because interest is received; therefore, debit Cash account with $1,000.
- Dividend Revenue is a revenue account. Revenue increases stockholders’ equity account. Therefore, credit Dividend Revenue account with $1,000.
Record the receipt entry of semiannual interest on debt investment.
Date | Accounts and Description | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
October | 1 | Cash | 2,800 | ||
Interest Revenue | 2,800 (5) | ||||
(To record receipt of semiannual interest on debt investments) |
Table (7)
Working Note:
Compute amount of interest received on bonds invested in Company T.
Description:
- Cash is an asset account. The amount has increased because interest is received; therefore, debit Cash account with $2,800.
- Interest Revenue is a revenue account. Revenue increases stockholders’ equity account. Therefore, credit Interest Revenue account with $2,800.
Record the sale entry of debt investment.
Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
October | 1 | Cash | 75,700 | ||
Gain on Sale of Debt Investments | 5,700 (6) | ||||
Debt Investments | 70,000 | ||||
(To record the sale of debt investment) |
Table (8)
Working Note:
Calculate the realized gain (loss) on sale of bonds.
Particulars | Amount ($) |
Cash proceeds from sale of bonds | 75,700 |
Less: Cost of bonds | 70,000 |
Gain (loss) on sale of bonds | 5,700 |
(6)
Table (9)
Description:
- Cash is an asset account. The amount has increased because the asset is disposed and cash is received; therefore, debit Cash account with $75,700.
- Gain on Sale of Debt Investments is an equity account. Since gain has occurred from disposal, the Equity is increased; therefore, credit Gain on Sale of Debt Investments account with $5,700.
- Debt Investments is an asset account. The amount has decreased because the asset is disposed; therefore, credit Debt Investments account with $70,000.
Prepare T-accounts of Debt Investment account, and Stock Investment accounts from the above transactions recorded.
Stock Investments Account:
Stock Investments | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
February 1 | Cash | 51,600 | August 1 | Cash | 8,400 | |
March 1 | Cash | 18,500 | August 1 | Loss on sale of stock investments | 200 | |
December 31 | Balance | $61,500 | ||||
December 31 | Total | 70,100 | December 31 | Total | 70,100 |
Table (10)
Debt Investments Account:
Debt Investments | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
April 1 | Cash | 70,000 | October 1 | Cash | 75,700 | |
October 1 | Gain on sale | 5,700 | December 31 | Balance | 0 | |
December 31 | Total | 75,700 | December 31 | Total | 75,700 |
Table (11)
(b)
To Prepare: The
(b)
Explanation of Solution
Record the unrealized loss on trading securities.
Date | Account Titles and Description | Post Ref. |
Debit ($) | Credit ($) | |
2017 | |||||
December | 31 | Unrealized Loss–Income | 7,500 (7) | ||
Fair Value Adjustment–Trading | 7,500 | ||||
(To record unrealized loss on trading securities) |
Table (12)
Description:
- Unrealized Loss–Income is an adjustment account to report loss on adjusting investment cost at fair market value. Since loss has occurred while adjusting; therefore, debit Unrealized Loss–Income account with $7,500.
- Fair Value Adjustment–Trading is a contra-asset account. The account shows a credit balance since the market price has decreased (loss); therefore, credit Fair Value Adjustment–Trading with $7,500.
Working Notes:
Compute the unrealized
Investment | Fair Value ($) | Cost ($) | Unrealized Loss ($) |
(A) | (B) | (C) = (A) – (B) | |
Company L |
39,000
|
43,000
| (4,000) |
Company NC |
15,000
|
18,500
| (3,500) |
Total | 54,000 | 61,500 | (7,500) |
(7)
Table (13)
(c)
To Prepare: The investments section of balance sheet of Company N.
(c)
Explanation of Solution
Prepare the balance sheet of Company N.
Company N | |
Balance Sheet (Partial) | |
December 31, 2017 | |
Particulars | Amount ($) |
Investments | |
Investment in stock of less than 20% owned in companies, at fair value | 54,000 |
Table (14)
(d)
To Identify: The income statement accounts and present the statement classification of each account.
(d)
Explanation of Solution
Prepare the presentation of related income statement accounts pertaining to stock and debt investments.
Company N | |
Income Statement (Partial) | |
December 31, 2017 | |
Particulars | Amount ($) |
Other Revenues and Gains: | |
Dividend revenue | $1,960 |
Interest revenue | 2,800 |
Gain on sale of debt investment | 5,700 |
Other Expenses and Losses: | |
Loss on sale of stock investment | 200 |
Unrealized loss–Income | 7,500 |
Table (15)
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Chapter AH Solutions
Financial Accounting: Tools for Business Decision Making, 8th Edition
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