Question

Hampton Developments Ltd. (Hampton) had the following transactions pertaining to its investments which are accounted for under fair value through profit & loss. This is the first year Hampton has ever purchased investments.

2019	Transaction Details
Jan. 1	Purchased 1,000 shares of Chapman Foods Ltd. (Chapman)for $50,000 cash, plus brokerage fees of $550. Purchased 5,000 shares of Sinclair Manufacturing Ltd (Sinclair) for $75,000.
June 1	Received cash dividends of $3 per share on the Chapman shares.
Sept. 15	Sold 500 Chapman shares for $25,900 less brokerage fees of $100.
Dec. 31	The fair value of the shares of Chapman was $35 per share. The fair value of the shares of Sinclair was $12 per share.
2020
Feb 14	Sold 1,250 shares of Sinclair for net proceeds of $35,000. The selling commission rate on the shares was 1.75%.
Dec. 31	The fair value of the shares of Chapman was $27 per share. The fair value of the shares of Sinclair was $23 per share.

Required:

Prepare all the journal entries required for the above noted transactions for 2019 & 2020

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Answer 1

Answer to Question :

Year 2019:

Date	Account Title	Debit($)	Credit($)
Jan 1	Investment A/c- Chapman	50,000
	To, Cash		50,000
	(Being 1000 shares of Chapman Foods Ltd purcahsed).
Jan 1	Brokerage A/c	500
	To, Cash		500
	(Being Brokerage paid for shares purchased)
Jan 1	Investment A/c- Sinclair	75,000
	To, Bank		75,000
	(Being 5,000 shares of Sinclair Manufacturing Ltd. purcahsed)
Jun1	Cash A/c	3,000
	To, Dividend		3,000
	(Received cash dividends of $3 per share on the Chapmans 1000 shares.
Sept 15	Bank	25,900
	To, Investment A/c- Chapman		25,900
	(Sold 500 shares of Chapman )
Sept 15	Brokerage A/c	100
	To, Cash		100
	(Being Brokerage paid for shares sold)
Dec 31	SPL A/c	600
	To, Brokerage		600
	(Being brokerage paid transferred to Statemment of Profit & Loss)
Dec 31	Dividend A/c	3,000
	To,SPL		3,000
	(Being dividend received credited to Statemment of Profit & Loss)
Dec 31	SPL A/c	22,500
	To,Investment A/c- Chapman		7500
	To,Investment A/c- Sinclair		15,000
	(Being Fair Value adjustment made at Closing date)

Working Note:

Chapman Ltd:

No. of shares available = 1000 shares - 500 shares = 500 shares

Purchase Price per share = $50000/1000 = $50 per share

Fair Value as on 31.12.2019 = $35 per share

Loss of ($50-$35) per share transferred to SPL.

Total Loss on Fair Value Adjustment of Chapman's Shares = 500 shares*$15 = $7,500

Sinclair:

No. of shares available = 5000 shares

Purchase Price per share = $75000/5000 = $15 per share

Fair Value as on 31.12.2019 = $12 per share

Loss of ($15-$12) per share transferred to SPL.

Total Loss on Fair Value Adjustment of Sinclair's Shares = 5000 shares*$3 = $15,000

...............................................................................................................................................................................

Year 2020:

Date	Account Title	Debit($)	Credit($)
Feb 14	Brokerage A/c	623.41
	To, Cash		623.41
	(Being Brokerage paid for shares purchased)
Feb 14	Bank	35,000
	To, Investment - Sinclair		35,000
	(Being 1250 shares sold of Sinclair)
Dec 31	SPL A/c	4000
	To,Investment A/c- Chapman		4000
	(Being Fair Value adjustment made at Closing date)
Dec 31	Investment A/c- Sinclair	41250
	To, Spl		41250

Working Note:

No of shares sold of Sinclair = 1250 shares

Net Proceeds = $35,000

Rate of Selling Commission = 1.75%

Gross Proceeds from Sale = $35,000/98.25% = $35623.41

Amount of Commission = $35623.41 - $35,000 = $623.41

Chapman:

No. of shares of Chapman available = 500 shares

Change In Fair Value = $27 -$35 = $8

Loss of $8 per share transferred to SPL.

Total Loss on Fair Value Adjustment of Chapman's Shares = 500 shares*$8 = $4000

Sinclair:

No. of shares available = 5000 shares- 1250 shares = 3750 shares

Change In Fair Value = $23-$12= $11