2.) Jones Company purchases 1,000 shares of Micro Corporation stock at $34 per share on July...

2.) Jones Company purchases 1,000 shares of Micro Corporation stock at $34 per share on July 31. The company expects to hold the stock for 6 months and then sell it. At December 31, the market price of the stock is $32 per share.

Required:

1. What type of investment is this for Jones Company? Explain your answer.

2. Prepare the necessary journal entries. Explanations are not required.

3. Discuss how Jones Company 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.

Expert Solution

Answer 1

For Jones Company the investment should be considered as securities held for trading .

Explanation : When any securities are held with an intention of selling them within short period of time ie for less than 1 year then such investment is classified as held for trading securities. Jones company purhase shares & expects to hold the stock for 6 months and then sell it . Thus , should be considered as securities held for trading .

Answer 2

Date	Accounts Titles & Explanation	Debit ($)	Credit($)
July 31	Investment in Trading securities [1,000 shares * $34]	34,000
	Cash		34,000

December 31	Unrealized loss on trading securities [($34 - $32)* 1,000]	2,000
	Investment in Trading securities		2,000

Answer 3

Securities held for trading should reported at current market price or fair value on the balance date. Any unrealized loss or gain should be accordingly booked in income statement for the year.

Jones Company should report inventment in trading securities at market price of $32 per share ie at $32,000 on the balance sheet . Unrealized loss on trading securities of $2 per share ie $2,000 on ncome statement for the year ended December 31.

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