Help with Problem C-4A Thank You Prepare journal entries to record these transac
ID: 2456934 • Letter: H
Question
Help with Problem C-4A
Thank You
Prepare journal entries to record these transactions and events and any year-end fair value adjustments to the portfolio of long-term available-for-sale securities. Prepare a table that summarizes the total cost, total fair value adjustment, and total fair value of the portfolio of long-term available-for-sale securities at each year-end. Prepare a table that summarizes the realized gains and losses and the unrealized gains or losses for the portfolio of long-term available-for-sale securities at each year-end. Stoll Co.'s long-term available-for-sale portfolio at December 31, 2012, consists of the following. Determine the amount Stoll should report on its December 31, 2013, balance sheet for its long-term investments in available-for-sale securities. Prepare any necessary December 31, 2013, adjusting entry to record the fair value adjustment for the long-term investments in available-for-sale securities. What amount of gains or losses on transactions relating to long-term investments in available-for-sale securities should Stoll report on its December 31,2013, income statement?Explanation / Answer
Answer
If there is an increase in the market rate over and above the purchase rate of AFS securities, then such increase is recorded as part of the other comprehensive income (OCI) as Unrealized Gain/Loss - OCI and not recognized as income in the current period. This is shown as part of the shareholders’ equity in the balance sheet.
Jan. 29 Sold 3,500 shares of Company B common stock for $799,188 less a brokerage fee of $1,500.
This is half the shareholding in Co. B, so we need to release half the carrying amount to calculate the gain or loss on disposal, as well as release half the amount relating to Co. B sitting in OCI.
Carrying amount $77,000 (half of $154,000)
add half unrealised loss transferred from OCI $2,690(159,380-154,000= $5,380/2,=$2,6900
less net proceeds from sale $77,688
= net Profit on disposal $2,002 recognised in income statement
After this, the carrying amount is $77,000.
Apr. 17 Purchased 10,000 shares of Company W common stock for $197,500 plus a brokerage fee of $2,400. The shares represent a 30% ownership in Company W.
An investment of 20 to 30% means the investor can exert significant influence and the equity method should be observed, and these are not AFS investments.
July 6 Purchased 4,500shares of Company X common stock for $126,562 plus a brokerage fee of $1,750. The shares represent a 10% ownership in Company X.
This an AFS investment and carrying amount is $128,312($126,562+$1,750)
Aug. 22 Purchased 50,000 shares of Company Y common stock for $375,000 plus a brokerage fee of $1,200. The shares represent a 51% ownership in Company Y.
51% would mean the company has control over Co. Y, which becomes the subsidiary. Again, this is not an AFS investment.
Nov. 13 Purchased 8,500 shares of Company Z common stock for $267,900 plus a brokerage fee of $2,450. The shares represent a 5% ownership in Company Z.
This would be an AFS investment. Carrying amount is $370,350($267,900+$2,450)
Dec. 9 Sold 40,000 shares of Company A common stock for $515,000 less a brokerage fee of $4,100
This is the complete shareholding of Co. A, so you need to reverse out the carrying amount $490,000, and the amount relating to Co. A sitting in OCI
Carrying amount $490,000
add unrealised loss transferred from OCI $45,300($535,300-490,000)
less net proceeds from sale $510,900($515,000-$4,100)
= net profit on sale of investments $24,400
After this, the company had 3 investments designated as AFS
3,500 shares of Company B common stock 77,000; FV $ 81,375
17,500 shares of Company C common stock $640,938; FV $610,312
8,500 shares of Company Z common stock $370,350; FV $278,800
Totals Common Stock = $1,088,288 FV = $970,487 , Difference = $117,801
Prepare any necessary December 31, 2013, adjusting entry to record the fair value adjustment for the long-term investments in available-for-sale securities?
Net profit = $2,002+$24,400 = $26,402
Dr Unrealised loss - OCI $117,801
Cr Investment in AFS securities $117,801
What amount of gains or losses on transactions relating to long-term investments in available-for-sale securities should Stoll report on its December 31, 2013, income statement?
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