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.
