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Chapter 13: Q2CA (page 658)

(Equity Securities) Lexington Co. has the following securities outstanding on December 31, 2017 (its first year of operations).

Cost Fair Value

Greenspan Corp. stock \(20,000 \)19,000

Summerset Company stock 9,500 8,800

Tinkers Company stock 20,000 20,600

\(49,500 \)48,400

During 2018, Summerset Company stock was sold for \(9,200, the difference between the \)9,200 and the “fair value” of \(8,800being recorded as a “Gain on Sale of Investments.” The market price of the stock on December 31, 2018, was Greenspan Corp.stock \)19,900; Tinkers Company stock $20,500.

Instructions

(a) What justification is there for valuing equity securities at fair value and reporting the unrealized gain or loss as part ofnet income?

(b) How should Lexington Co. report this information in its financial statements on December 31, 2017? Explain.

(c) Did Lexington Co. properly account for the sale of the Summerset Company stock? Explain.

(d) Are there any additional entries necessary for Lexington Co. on December 31, 2018, to reflect the facts on the financialstatements in accordance with generally accepted accounting principles? Explain

Short Answer

Expert verified

All the entries are passed according to the generally accepted principles.

Step by step solution

01

Valuing equity securities at fair value

Available-for-securities are known as the “non-strategic “investment because the sale period is not fixed in these types of securities. It is sold according to the value of the securities. Hence, these securities are valued at fair value.

02

Step 2:Preparation of financial statements

Theunrealisedloss will be deducted from the company’s net income as other comprehensive losses in the income statement.

Income Statement
Lexington Co.
December 31, 2017

Net Income:

Other Comprehensive Loss

($1,100)

03

Entry for the sale of investment

No, the entry of the sale of stock is not correctly made. Because there is a loss on the sale of the store rather than gain on the sale of an investment. To calculate the amount of loss or gain, we compare the selling price with the cost price of the stock, not with the fair value of the stock.

04

Step 4:Necessary entries

There is no need to pass additional entries because all the necessary entries are given in the question according to the accepted accounting principles.

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Most popular questions from this chapter

E13-10 (L03) (Warranties) Soundgarden Company sold 200 color laser copiers on July 10, 2017, for \(4,000 apiece, together with a 1-year warranty. Maintenance on each copier during the warranty period is estimated to be \)330.

Instructions

Prepare entries to record the sale of the copiers, the related warranty costs, and any accrual on December 31, 2017. Actual warranty costs (inventory) incurred in 2017 were $17,000.

A typical provision is:

(a) bonds payable (c) a warranty liability

(2) cash (d) accounts payable

(Available-for-Sale and Held-to-Maturity Debt Securities Entries) The following information relates to the debt

securities investments of Wildcat Company.

1. On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of \(300,000 at 100 plus accrued interest.

Interest is payable on April 1 and October 1.

2. On April 1, semiannual interest is received

3. On July 1, 9% of bonds of Sampson, Inc. were purchased. These bonds with a par value of \)200,000 were purchased at 100

plus accrued interest. Interest dates are June 1 and December 1.

4. On September 1, bonds with a par value of $60,000, purchased on February 1, are sold at 99 plus accrued interest.

5. On October 1, semiannual interest is received.

6. On December 1, semiannual interest is received.

7. On December 31, the fair value of the bonds purchased February 1 and July 1 were 95 and 93, respectively.

Instructions

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available-for-sale securities.

(b) If Wildcat classified these as held-to-maturity investments, explain how the journal entries would differ from those in part (a).

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