Question

1. In 2019, its first year of operations, Brighton Finance Corporation, based in London, UK, had the following transactions regarding its investments (currency in British pound, £):

May. 1 Purchased 600 Clifford Ltd. common shares for £60 per share. This investment is held for trading purposes.

June. 1 Purchased 1,000 bonds of Gladstone Inc. at face-value price of £100 each. These bonds bear interest at 6%, which is paid semi-annually on November 30 and May 31 each year. They were also purchased for trading purposes.

July. 1    Purchased 4,000 Waterloo Corporation common shares for £70 per share. This represents 25% of the issued common shares. Because of this investment, the directors of Waterloo have invited a Brighton’s executive to sit on their board.

Sep. 1 Received a £1-per-share cash dividend from Waterloo Corporation.

Nov. 1 Sold 200 Clifford Ltd. common shares for £63 per share.

Nov. 30 Interest on the Gladstone Inc. bonds was received.

Dec. 15 Received a £0.50-per-share cash dividend on Clifford Ltd. common shares.

Dec. 31 On this date, the fair values per share were £55 for Clifford Ltd. and £73 for Waterloo Corporation. The fair value of the Gladstone bonds was £101 each. Waterloo reported a profit for the year ended December 31, 2019, of £100,000.

Instructions:

1. Make journal entries on the above transactions up to Dec. 15.
2. Prepare the adjusting journal entries required to report the investments at their fair value and accrue any investment revenue at the end of 2019.
3. Show the partial presentation of each investment and the related investment income reflected in Brighton’s 2019 statement of financial position and income statement.

Answer 1

Answer-A:

Date	Accounts	Debit (£)	Credit (£)
May.01	Equity investment-Clifford	36,000
	Cash		36,000
June.01	Bonds investment	100,000
	Cash		100,000
July.01	Equity investment-Waterloo	36,000
	Cash		36,000
Sep.01	Cash	4,000
	Equity investment-Waterloo		4,000
Nov.01	Cash	12,600
	Equity investment-Clifford		12,000
	Profit on sale of investment		600
Nov.30	Cash	3,000
	Interest revenue (1,000*£100*6%/2)		3,000
Dec.15	Cash	200
	Dividend income (400*£0.50)		200

Adjusting entry
Date	Accounts	Debit (£)	Credit (£)
Dec.31	Unrealized loss on investment	2,000
	Equity investment-Clifford		2,000
Dec.31	Bond investment	1,000
	Unrealized gain on investment		1,000

Answer-B:

Income Statement
Interest revenue	£          3,000
Dividend revenue	200	£           3,200
Unrealized loss on investment	-£          2,000
Unrealized gain on investment	1,000	-£          1,000

The above unrealized loss or gain on trading securities will be shown in income statement only.

Answer-C:

Balance Sheet (Partial)
Bond investment-Trading (Fair value)	£      101,000
Equity investment-Trading (Fair value)	22,000
Equity investment-Influential (Cost)	32,000

Equity investment-Trading (Fair value) = 400*£55 = £22,000

Equity investment-Influential (Cost) = £36,000 - 4,000 (Dividend) = £32,000