Question

Question: (Equity Securities) Lexington Co. has the following securities outstanding on December 31, 2017 (its first year of operations).

Cost Fair Value

Greenspan Corp. stock $20,000 $19,000

Summerset Company stock 9,500 8,800

Tinkers Company stock 20,000 20,600

$49,500 $48,400

During 2018, Summerset Company stock was sold for $9,200, the difference between the $9,200 and the “fair value” of $8,800

being recorded as a “Gain on Sale of Investments.” The market price of the stock on December 31, 2018, was Greenspan Corp.

stock $19,900; Tinkers Company stock $20,500.

Instructions

(a) What justification is there for valuing equity securities at fair value and reporting the unrealized gain or loss as part of net income?

(b) How should Lexington Co. report this information in its financial statements on December 31, 2017? Explain.

(c) Did Lexington Co. properly account for the sale of the Summerset Company stock? Explain.

(d) Are there any additional entries necessary for Lexington Co. on December 31, 2018, to reflect the facts on the financial

statements in accordance with generally accepted accounting principles? Explain

 

Answer 1

Step 1: Definition of equity securities

Equity securities are securities whose holders are known as the company’s owners.

Step 2: Valuing equity securities at fair value

Available-for-securities are known as the “non-strategic “investment because the sale period is not fixed in these types of securities. It is sold according to the value of the securities. Hence, these securities are valued at fair value.

Step 3: Preparation of financial statements

The unrealised loss will be deducted from the company’s net income as other comprehensive losses in the income statement.

Income Statement

Lexington Co.

December 31, 2017

Net Income:

Other Comprehensive Loss ($1,100)

 

 

Step 4: Entry for the sale of investment

No, the entry of the sale of stock is not correctly made. Because there is a loss on the sale of the store rather than gain on the sale of an investment. To calculate the amount of loss or gain, we compare the selling price with the cost price of the stock, not with the fair value of the stock.

Step 5: Necessary entries

There is no need to pass additional entries because all the necessary entries are given in the question according to the accepted accounting principles.

 

Answer:

All the entries are passed according to the generally accepted principles.