Question

Rose Company had no short-term investments prior to year 2017. It had the following transactions involving short-term investments in available-for-sale securities during 2017.
Apr. 16 Purchased 6,000 shares of Gem Co. stock at $21.50 per share plus a $340 brokerage fee.
May 1 Paid $210,000 to buy 3-month U.S. Treasury bills (debt securities): $210,000 principal amount, 4% interest, securities mature on July 31.
July 7 Purchased 3,000 shares of PepsiCo stock at $52.00 per share plus a $310 brokerage fee. 20 Purchased 1,500 shares of Xerox stock at $16.00 per share plus a $390 brokerage fee.
Aug. 1 Received a check for principal and accrued interest on the U.S. Treasury bills that matured on July 31.
Aug 15 Received an $.95 per share cash dividend on the Gem Co. stock. 28 Sold 3,000 shares of Gem Co. stock at $28.25 per share less a $430 brokerage fee.
Oct. 1 Received a $1.80 per share cash dividend on the PepsiCo shares.
Dec. 15 Received a $1.10 per share cash dividend on the remaining Gem Co. shares.
Dec. 31 Received a $1.10 per share cash dividend on the PepsiCo shares.

Required:
a. Prepare journal entries to record the preceding transactionsand events.
b. Prepare a table to compare the year-end cost and fair valuesof Perryâs short-term investments in available-for-sale securities.The year-end fair values per share are: Gem Co., $28.00; PepsiCo,$46.25; and Xerox, $12.00.
c. Prepare an adjusting entry, if necessary, to record theyear-end fair value adjustment for the portfolio of short-terminvestments in available-for-sale securities.

Answer 1

Answer:

Rose Company

1. Journal Entries:

April 16:

Debit Investments in available for sale securities $129,340

Credit Cash Account $129,340

To record the purchase of 6,000 shares of Gem Co. stock at $21.50 per share plus a $340 brokerage fee.

May 1:

Debit U.S. Treasury Bills $210,000

Credit Cash Account $210,000

To record the purchase of 3-month U.S. Treasury bills, 4% interest.

July 7:

Debit Investment in PepsiCo Stock $156,310

Credit Cash Account $156,310

To record the purchase of 3,000 shares of PepsiCo stock at $52.00 per share plus a $310 brokerage fee.

July 20:

Debit Investment in Xerox Stock $24,390

Credit Cash Account $24,390

To record the purchase of 1,500 shares of Xerox stock at $16.00 per share plus a $390 brokerage fee.

July 31:

Debit Interest Receivable from U.S. Treasury Bills $2,100

Credit Interest Revenue $2,100

To record the accrued interest on the bills.

Aug. 1:

Debit Cash Account $212,100

Credit Interest Receivable $2,100

Credit U.S. Treasury Bills $210,000

To record the receipt of check for principal and accrued interest on July 31 maturity.

Aug. 15:

Debit Cash Account $5,700

Credit Dividend $5,700

To record receipt of $.95 per share cash dividend on the Gem Co. stock.

Aug. 28:

Debit Cash Account $84,320

Credit Investment in available for sale securities $84,320

To record the sale of 3,000 shares of Gem Co. stock at $28.25 per share less a $430 brokerage fee.

Oct. 1:

Debit Cash Account $5,400

Credit Dividends $5,400

To record the receipt of cash dividends on PepsiCo shares.

Dec. 15:

Debit Cash Account $3,300

Credit Dividends $3,300

To record the receipt of cash dividends on 3,000 GemCo shares.

Dec. 31:

Debit Cash Account $3,300

Credit Dividends $3,300

To record the receipt of $1.10 per share cash dividend on the PepsiCo shares.

b.  Comparison of year-end cost and fair values of short-term investments:

                              Year-end     units          Fair             Fair Value

                                  cost                         Values        Difference

Gem Co., $28.00    $45,020    3,000     $84,000       $38,980

PepsiCo,$46.25     $156,310    3,000    $138,750       -$17,560

Xerox, $12.00         $24,390     1,500      $18,000        -$6,390

c. Adjusting Entries

Dec. 31:

Debit Investment in available for sale securities $38,980

Credit Unrealized Gain on Investment $38,980

To record the unrealized gain based on fair value.

Dec. 31:

Debit Unrealized Loss $17,560

Credit Investment in PepsiCo Stock $17,560

To record the unrealized loss based on fair value.

Dec. 31:

Debit Unrealized Loss $6,390

Credit Investment in Xerox $6,390

To record the unrealized loss based on fair value.

Explanation:

a) Year-end Balances:

GemCo.

Initial investment = $129,340

Sale of 3,000 share (84,320)

Ending balance  =  $45,020

PepsiCo.

Initial investment = $156,310

Xerox

Initial investment = $24,390

b) Unrealized Gains and Losses on Investments:  These are not tax deductible.  As a rule, you do not pay taxes on such gains and losses.  They are recorded in the Statement of Changes in Equity.