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Chapter 13: Q5P (page 658)

EXCEL (Equity Securities Entries and Disclosures) Parnevik Company has the following securities in its

investment portfolio on December 31, 2017 (all securities were purchased in 2017): (1) 3,000 shares of Anderson Co. common

stock which cost \(58,500, (2) 10,000 shares of Munter Ltd. common stock which cost \)580,000, and (3) 6,000 shares of King Company

preferred stock which cost \(255,000. The Fair Value Adjustment account shows a credit of \)10,100 at the end of 2017.

In 2018, Parnevik completed the following securities transactions.

1. On January 15, sold 3,000 shares of Anderson’s common stock at \(22 per share less fees of \)2,150.

2. On April 17, purchased 1,000 shares of Castle’s common stock at \(33.50 per share plus fees of \)1,980.

On December 31, 2018, the market prices per share of these securities were Munter \(61, King \)40, and Castle $29. In addition, the

accounting supervisor of Parnevik told you that, even though all these securities have readily determinable fair values, Parnevik

will not actively trade these securities because the top management intends to hold them for more than one year.

Instructions

(a) Prepare the entry for the security sale on January 15, 2018.

(b) Prepare the journal entry to record the security purchase on April 17, 2018.

(c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on December 31, 2018.

(d) How should the unrealized gains or losses be reported on Parnevik’s income statement and balance sheet?

Short Answer

Expert verified

Cash debited by $63,850, gain on sale of securities credited by $5,350 and equity investment credited by $58,500. Equity investment debited by $35,480 and cash credited by $35,480. Unrealized holding loss debited by $10,000 and Fair value adjustment credited by $10,000.

Step by step solution

01

Entry for the sale of securities

Date

Particulars

Debit

Credit

January 15, 2018

Cash

$63,850

Gain on sale of securities

$5,350

Equity investment

$58,500

(Being entry for the sale of securities)

02

Entry for the purchase of securities

Date

Particulars

Debit

Credit

April 17, 2018

Equity Investment

$35,480

Cash

$35,480

(Being entry for the purchase of securities

03

Fair value adjustment of securities

Date

Particulars

Debit

Credit

December 31, 2018

Unrealized holding loss

$10,000

Fair value adjustment

$10,000

(Being entry for the fair value adjustment of securities)

04

Treatment of unrealized income and losses in the financial statements

In the balance sheet, unrealized gains and losses are recorded in the other comprehensive incomeunder the head of owner’s equity.

Unrealized gains and losses are not recognized until securities are sold in the income statement.

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Most popular questions from this chapter

Consider the bond investment by Lady Gaga in IFRS17-5. Discuss the accounting for this investment if Lady Gaga’s

Business model is to hold the investment to collect interest while outstanding and to receive the principal at maturity.

What is the nature of a “discount: on notes payable?

(Equity Securities Entries) McElroy Company has the following portfolio of investment securities at September

30, 2017, its most recent reporting date.

Investment Securities Cost Fair Value

Horton, Inc. common (5,000 shares) \(215,000 \)200,000

Monty, Inc. preferred (3,500 shares) 133,000 140,000

Oakwood Corp. common (1,000 shares) 180,000 179,000

On October 10, 2017, the Horton shares were sold at a price of \(54 per share. In addition, 3,000 shares of Patriot common stock

were acquired at \)54.50 per share on November 2, 2017. December 31, 2017, fair values were Monty \(106,000, Patriot

\)132,000, and Oakwood $193,000.

Instructions

Prepare the journal entries to record the sale, purchase, and adjusting entries related to the equity securities in the last quarter of 2017

Pacific Airlines Co. awards members of its Frequent Fliers Club one free round-trip ticket, anywhere on its flight system, for every 50,000 miles flown on its planes. How would you account for the free ticket award?

(Fair Value and Equity Methods) Brooks Corp. is a medium-sized corporation specializing in quarrying stonefor building construction. The company has long dominated the market, at one time achieving a 70% market penetration. Duringprosperous years, the company’s profits, coupled with a conservative dividend policy, resulted in funds available for outside

investment. Over the years, Brooks has had a policy of investing idle cash in equity securities. In particular, Brooks has made periodicinvestments in the company’s principal supplier, Norton Industries. Although the firm currently owns 12% of the outstandingcommon stock of Norton Industries, Brooks does not have significant influence over the operations of Norton Industries.

Cheryl Thomas has recently joined Brooks as assistant controller, and her first assignment is to prepare the 2017 year-endadjusting entries for the accounts that are valued by the “fair value” rule for financial reporting purposes. Thomas has gatheredthe following information about Brooks’ pertinent accounts.

1. Brooks has equity securities related to Delaney Motors and Patrick Electric. During 2017, Brooks purchased 100,000 shares of

Delaney Motors for \(1,400,000; these shares currently have a fair value of \)1,600,000. Brooks’ investment in Patrick Electrichas not been profitable; the company acquired 50,000 shares of Patrick in April 2017 at \(20 per share, a purchase that currentlyhas a value of \)720,000.

2. Prior to 2017, Brooks invested \(22,500,000 in Norton Industries and has not changed its holdings this year. This investmentin Norton Industries was valued at \)21,500,000 on December 31, 2016. Brooks’ 12% ownership of Norton Industries has acurrent fair value of \(22,225,000 on December 2017.

Instructions

(a) Prepare the appropriate adjusting entries for Brooks as of December 31, 2017, to reflect the application of the “fairvalue” rule for the securities described above.

(b) For the securities presented above, describe how the results of the valuation adjustments made in (a) would be reflectedin the body of Brooks’ 2017 financial statements.

(c) Prepare the entries for the Norton investment, assuming that Brooks owns 25% of Norton’s shares. Norton reportedincome of \)500,000 in 2017 and paid cash dividends of $100,000.
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