FKG Inc. carries the following debt investments on its books at December 31, 2017, and December...

FKG Inc. carries the following debt investments on its books at December 31, 2017, and December 31, 2018. All securities were purchased during 2017. Trading Securities: Company Cost Value, Dec. 31, 2017 Value, Dec. 31, 2018 A Company $25,000 $13,000 $20,000 B Company $13,000 $20,000 $20,000 C Company $35,000 $30,000 $25,000 Available for Sale Securities: Company Cost Value, Dec. 31, 2017 Value, Dec. 31, 2018 X Company $210,000 $130,000 $50,000 Y Company $ 50,000 $ 60,000 $70,000

Required:

(1.) Prepare the necessary journal entries for FKG on December 31, 2017, and December 31, 2018.

(2.) What net effect would the valuation of these debt investments have on 2017 net income?

(3.) What net effect would the valuation of these debt investments have on 2018 net income?

Expert Solution

(1) Prepare the necessary journal entries for FKG on December 31, 2017, and December 31, 2018.

Journal entries for FKG on December 31, 2017

Date Accounting title Debit Credit Dec. 31, 2017 Loss on Trading Investments (25000-13000) $ 12,000 Investment in A Company $ 12,000 Investment in B Company $ 7,000 Profit on Trading Investments (20000-13000) $ 7,000 Loss on Trading Investments (35000-30000) $ 5,000 Investment in C Company $ 5,000 Unrealized Gain / Loss (210000-130000) $ 80,000 Investment in X Company $ 80,000 Investment in Y Company $ 10,000 Unrealized Gain / Loss (60000-50000) $ 10,000

Journal entries for FKG on December 31, 2018

DATE	ACCOUNTING TITLE	DEBIT	CREDIT
Dec. 31, 2018	Investment in A Company	$7,000
	Profit on held for Trading Investments (20000-13000)		$ 7,000

	Loss on held for Trading Investments (30000-25000)	$5,000
	Investment in C Company		$5,000

	Unrealized Gain / Loss (130000-50000)	$80,000
	Investment in X Company		$80,000

	Investment in Y Company	$10,000
	Unrealized Gain / Loss (70000-60000)		$10,000

2) What net effect would the valuation of these debt investments have on 2017 net income?

Calculation of Effect on 2017 Net income :

COMPANY NAME	a	b	c	b-a
	COST	Dec. 31, 2017	Dec. 31, 2018	2017
A COMPANY	$25,000	$13,000	$20,000	($12,000)
				Decrease in net income
B COMPANY	$13,000	$20,000	$20,000	($7,000)
				Increase in net income
C COMPANY	$35,000	$30,000	$25,000	($5,000)
				Decrease in net income
				($10,000)
Overall change is				Decrease in net income

(3) What net effect would the valuation of these debt investments have on 2018 net income?

Calculation of Effect on 2018 Net income :

COMPANY NAME	a	b	c	c -b
	COST	Dec. 31, 2017	Dec. 31, 2018	2018
A COMPANY	$25,000	$13,000	$20,000	($7,000)
				Increase in net income
B COMPANY	$13,000	$20,000	$20,000	$ 0
				No change
C COMPANY	$35,000	$30,000	$25,000	($5,000)
				Decrease in net income
				($10,000)
Overall change is				Increase in net income

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