The investments of Harlon Enterprises included the following cost and fair value
ID: 2530441 • Letter: T
Question
The investments of Harlon Enterprises included the following cost and fair value amounts: ($ in millions) Fair Value, Dec. 31 Equity Investments
Required: 1. What is the effect of the sale of the A Corporation shares and the purchase of the C Corporation shares on Harlon's 2019 pretax earnings?
2. At what amount should Harlon's securities equity investment portfolio be reported in its 2019 balance sheet?
($in millions) Fair Value, Dec. 31 Equity Investments A Corporation shares B Corporation share:s C Corporation shares D Industries shares Cost $ 20 35 15 45 $115 2018 $14 35 na 46 2019 na $ 37 14 50 $101 Totals $95Explanation / Answer
1. What is the effect of the sale of the A Corporation shares and the purchase of the C Corporation shares on Harlon's 2019 pretax earnings?
Solution:
The sale of the A Corporation shares reduced Harlon’s pretax earnings by $5 million. The purchase of the C Corporation shares will have no effect on Harlon’s earnings in year 2019 because the shares are classified as available-for-sale investments, and any unrealized losses or gains occurring after purchase during 2019 would not affect the earnings in year). Journal entries used to record those two transactions:
Debit
Credit
($ in millions)
($ in millions)
June 1, 2019
Cash
15
Loss on sale of investments
5
Investment in A Corporation shares (cost)
20
September 12, 2019
Investment in C Corporation shares
15
Cash
15
2) At what amount should Harlon's securities equity investment portfolio be reported in its 2019 balance sheet?
Solution: In Year 2019 Harlon’s securities available-for-sale portfolio should be reported in the balance sheet at its fair value of $101 million
Working:
Securities Available-for-Sale
2018
2019
2018
2019
Corporation shares
20
na
14
na
Corporation shares
35
35
35
37
Corporation shares
na
15
na
14
Industries shares
45
45
46
50
100
95
95
101
Harlon would have had a net unrealized loss of $5 (computed as cost of $100 minus fair value of $95). Thus moving from a -$5 (2018) to a +$6 needs an increase of $11
Debit
Credit
($ in millions)
($ in millions)
June 1, 2019
Cash
15
Loss on sale of investments
5
Investment in A Corporation shares (cost)
20
September 12, 2019
Investment in C Corporation shares
15
Cash
15
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