You are working for The Wellington Company on temporary assignment while one of
ID: 2563928 • Letter: Y
Question
You are working for The Wellington Company on temporary assignment while one of the accountants is on family leave. You have been asked to review the company’s investment journal entries and provide necessary information to the accountant preparing the financial statements.
PAGE 8
JOURNAL
DATE
DESCRIPTION
POST. REF.
DEBIT
CREDIT
1
Jan. 17
Investment-Red Rock Co. Stock
37,400.00
2
Cash
37,400.00
3
Feb. 5
Investment-Sunset Village Bonds
34,000.00
4
Interest Receivable
290.00
5
Cash
34,290.00
6
23
Investment-Mays and Co. Stock
25,500.00
7
Cash
25,500.00
8
Mar. 31
Cash
340.00
9
Interest Receivable
290.00
10
Interest Revenue
50.00
11
Apr. 6
Investment in Minions Corp. Stock
170,000.00
12
Cash
170,000.00
13
30
Cash
750.00
14
Dividend Revenue
750.00
15
Jul. 1
Cash
16,666.00
16
Loss on Sale of Investments
2,244.00
17
Interest Revenue
210.00
18
Investment-Sunset Village Bonds
18,700.00
19
Aug. 14
Cash
41,200.00
20
Gain on Sale of Investments
1,800.00
21
Investment-Harding Construction Stock
39,400.00
22
27
Cash
3,400.00
23
Investment in Minions Corp. Stock
3,400.00
24
Sep. 22
Cash
29,000.00
25
Gain on Sale of Investments
3,500.00
26
Investment-Mays and Co. Stock
25,500.00
27
30
Cash
130.00
28
Interest Revenue
130.00
29
Nov. 1
Investment in Minions Corp. Stock
20,400.00
30
Income of Minions Corp.
20,400.00
31
Dec. 31
Unrealized Loss on Available-For-Sale Investments
3,275.00
32
Valuation Allowance for Available-For-Sale Investments
3,275.00
33
31
Valuation Allowance for Trading Investments
2,150.00
34
Unrealized Gain on Trading Investments
2,150.00
Review the journal entries on The Wellington Company panel then answer the questions below.
1. Which item is likely to be a trading security? A)Minions Corp., Hearding Construction, Red Rock Co., or Mays and Co. Why? Because it was sold at a profit, Because it is not as expensive, or Because it was under book value
2. How are brokerage commission fees treated on stock sales vs. stock purchases?
They are added to the cost of the stock for both, They are deducted from cash received or included in the stock cost, They are charged to miscellaneous expense, It depends whether it is a trading or an available-for-sale investment, or They are tracked in a separate account for purchases
3. Based on these journal entries, what is the company’s investment in Sunset Village bonds at the end of the year?
4. The journal entry on Aug. 27 most likely shows
1. Unrealized loss on Minions Corp. stock 2. Divided of Minions Corp. stock 3. Purchase of Minions Corp. stock 4. A profit on Minions Corp. stock or 5. Sale of Minions Corp. stock
5. As an investment, bonds are always categorized as
A) trading securities b) available-for-sale securities c) none of these answers d) equity securities e) held-to-maturity securities
6. What is the company’s investment in Minions Corp. at the end of the year?
7. Which of the investments below are likely to be available-for-sale securities? Check all that apply.
Minions Corp. stock
Cannot be determined
Mays and Co. stock
Harding Construction stock
Sunset Village bonds
Red Rock Co. stock
The accountant preparing the financial statements has asked you to provide the fair value as of the end of the year for the investments. Present the information as it would be shown on the financial statements. Last year, The Wellington Company reported costs of $68,000 in trading investments and $82,000 in available-for-sale investments. Refer to the journal entries shown on The Wellington Company panel. Assume that all investments sold during this year were trading investments and that purchases during the year were new investments.
1. Select the correct label for each line and fill in the amount. In classifying the investments, choose a categorization which seems most likely, given the pattern of transactions in the journal entries. Enter all amounts as positive numbers. If an amount box does not require an entry, leave it blank.
Trading Securities
Trading investments at fair value
$
$
Available-For-Sale Securities
$
$
2. Where on the balance sheet do trading securities appear?
3. Where in the financial statements do available-for-sale securities NOT appear?
4. Where are held-to-maturity securities reported? Based on the journal entries for this year, does the company have any held-to-maturity securities?
5. Where are securities held for strategic reasons reported in the financial statements when using the equity method? Based on the journal entries for this year, does The Wellington Company have any equity securities?
6. Which of the items below does not affect net income? Check all that apply.
realized gain on trading securities
none of these answers is correct
only unrealized gains or losses for all investments
unrealized gain on available-for-sale securities
realized loss on available-for-sale securities
unrealized loss on trading securities
both gains and losses of any sort for all investments
DATE
DESCRIPTION
POST. REF.
DEBIT
CREDIT
1
Jan. 17
Investment-Red Rock Co. Stock
37,400.00
2
Cash
37,400.00
3
Feb. 5
Investment-Sunset Village Bonds
34,000.00
4
Interest Receivable
290.00
5
Cash
34,290.00
6
23
Investment-Mays and Co. Stock
25,500.00
7
Cash
25,500.00
8
Mar. 31
Cash
340.00
9
Interest Receivable
290.00
10
Interest Revenue
50.00
11
Apr. 6
Investment in Minions Corp. Stock
170,000.00
12
Cash
170,000.00
13
30
Cash
750.00
14
Dividend Revenue
750.00
15
Jul. 1
Cash
16,666.00
16
Loss on Sale of Investments
2,244.00
17
Interest Revenue
210.00
18
Investment-Sunset Village Bonds
18,700.00
19
Aug. 14
Cash
41,200.00
20
Gain on Sale of Investments
1,800.00
21
Investment-Harding Construction Stock
39,400.00
22
27
Cash
3,400.00
23
Investment in Minions Corp. Stock
3,400.00
24
Sep. 22
Cash
29,000.00
25
Gain on Sale of Investments
3,500.00
26
Investment-Mays and Co. Stock
25,500.00
27
30
Cash
130.00
28
Interest Revenue
130.00
29
Nov. 1
Investment in Minions Corp. Stock
20,400.00
30
Income of Minions Corp.
20,400.00
31
Dec. 31
Unrealized Loss on Available-For-Sale Investments
3,275.00
32
Valuation Allowance for Available-For-Sale Investments
3,275.00
33
31
Valuation Allowance for Trading Investments
2,150.00
34
Unrealized Gain on Trading Investments
2,150.00
Explanation / Answer
1. Trading security referes to the shares purchased with the intention of sale within a short period of time say less than one year. In the given question, stock of Mays and Co. is a trding security since the same are sold within one year of purchase.
2. Brokerage commission fees paid on the stock sales is deducted from the cash received on sale of such stock to calculate the net gain or loss. And the Brokerage commission fees on stock purchases is added to the overall cost of stocks to book them in the accounts.
3. Sunset Village bonds are available for sale Invesments as part of such bonds is already sold before the maturity. Therefore, these are required to be recorded at fair market value of such invenstments.
Book Value of Sunset Village bonds = $34,000 - $18,700 = $15,300
Unrealized Loss on Available-For-Sale Investments = $3,275
Value of Invesment in Sunset Village bonds = $15,300 - $3,275 = $12,025
4. August 27 entry shows Dividend received on Investment in Minions Corp. Stock. This is because when a corporation receives dividend for the invenstment in another company's stocks, then the investor company book value of such investment is reduced by the amount of devidend received for such stock. Moreover, same cannot be considered as sale of investment as there is no profit or loss booked by the company in this journal entry.
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