E5-21A (Learning Objective 1: Apply GAAP for short-term investments) Eastern Cor
ID: 2567234 • Letter: E
Question
E5-21A (Learning Objective 1: Apply GAAP for short-term investments) Eastern Corporation, the investment banking company, often has extra cash to invest. Suppose Eastern buys 1,000 shares of Dream, Inc., stock at $57 per share. Assume Eastern expects to hold the Dream stock for one month and then sell it. The purchase occurs on December 15, 2012. At December 31, the market price of a share of Dream stock is $58 per share. Requirements 1. What type of investment is this to Eastern? Give the reason for your answer 2. Record Eastern's purchase of the Dream stock on December 15 and the adjustment to market value on December 31 3. Show how Eastern would report this investment on its balance sheet at December 31 and any gain or loss on its income statement for the year ended December 31, 2012. 4. IF I TOLD YOU THAT SAME SCENARIO, EXCEPT, EASTERN DOES NOT KNOW WHEN IT WILL SELL THE STOCK (INTENT), HOW DO THINGS CHANGE? PS If you have not tried this question, and a lot of you have not (and the bank rec), I would. You have a midterm and final coming up, where things like this will/maybe on itExplanation / Answer
1. when a person buys shares with an intention to sell it in the short term they are treated as trading investments
2.
3. In balance sheet in current assets,
In income statement
gain on fair valuation of investment- 1000
will be reported
4. if company not knows when investment will be sold, they are classified as available for sale investments:
Entry:
In balance sheet in current assets,
In other comprehensive income
gain on fair valuation of investment- 1000
will be reported
Date Account Debit Credt Dec 15 Investment in dream common stock 57000 To cash 57000 [shares bought] Dec 31 Investment in dream common stock 1000 To gain on fair valuation of investment- I/S 1000 [1 increased per share in value recorded in income statement]Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.