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:
<h2>
Purchase of share:</h2>
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.
<h3>
Journal entry to record the purchase of shares:</h3>
Debit: Equity investment $10,080
Credit: Cash $10,080
<h2>
Sale of shares:</h2>
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
<h3>
Journal entry to record the sale of the shares</h3>
Debit: Cash $5,640
Credit: Equity investment $5,040
Credit: Gain on sale of 120 shares $600
<h2>
Recording unrealised loss on the equity investment at the year-end:</h2>
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:
<h3>
Journal entry to make fair value adjustment:</h3>
Debit: Unrealised loss on holding equity investment $600
Credit: Securities fair value adjustment $600
