Question

Flounder Co. had purchased 240 shares of Washington Co. for $42 each this year (Oregon Co. does not have significant influence). Flounder Co. sold 120 shares of Washington Co. stock for $47 each. At year-end, the price per share of the Washington Co. stock had dropped to $37.Prepare the journal entries for these transactions and any year-end adjustments

Answer 1

Answer:

Purchase of shares:

Debit: Equity investment $10,080

Credit: Cash $10,080

Sale of 120 shares:

Debit: Cash $5,640

Credit: Equity investment  $5,040

Credit: Gain on sale of 120 shares $600

Journal entry to make fair value adjustment:

Debit: Unrealised loss on holding equity investment $600

Credit: Securities fair value adjustment $600

Explanation:

Purchase of share:

Number of shares purchased: 240 shares

Price per share = $42 per share

Total value of shares purchased = Number of shares purchased × Price per share

Total value of shares purchased = 240 ×  $42 per share

Total value of shares purchased = $10,080

The journal entry to record the purchase of share would be as follows:

• Equity investment is a current asset, this is an investment - A debit item

• Cash - another current asset, decreased - A credit would be made.

Journal entry to record the purchase of shares:

Debit: Equity investment $10,080

Credit: Cash $10,080

Sale of shares:

Number of shares sold = 120 shares

Selling price per share = $47 per share

Value of shares sold = 120 shares × $47 per share

Value of shares sold = $5,640

Cost of equity investment for 120 shares = 120 shares × $42 per share

Cost of equity investment for 120 shares = $5,040

There is a gain on sale of shares = $5,640 - $5,040

Gain on sale of shares = $600

Journal entry to record the sale of the shares

Debit: Cash $5,640

Credit: Equity investment  $5,040

Credit: Gain on sale of 120 shares $600

Recording unrealised loss on the equity investment at the year-end:

The price per share has dropped to $37, therefore, we need to adjust the fair value of the investment.

Journal entry to adjust the fair value of equity investment:

Remaining shares: 240 shares - 120 shares(sold) = 120 shares

Cost of equity investment for 120 shares = 120 shares × $42 per share

Cost of equity investment for 120 shares = $5,040

Cost of remaining shares at the year-end = 120 shares × $37 per share

Cost of remaining shares at the year-end = $4,440

There is an unrealised loss on the value of shares = $5,040 - $4,440 = $600.

We need to make a fair value adjustment to the investment:

Journal entry to make fair value adjustment:

Debit: Unrealised loss on holding equity investment $600

Credit: Securities fair value adjustment $600