While reviewing the March 31, 2020, balance sheet of Business Solutions, Santana Rey notes that the...

While reviewing the March 31, 2020, balance sheet of Business Solutions, Santana Rey notes that the business has built a large cash balance of $68,146. Its most recent bank money market statement shows that the funds are earning an annualized return of 0.64%. S. Rey decides to make several investments with the desire to earn a higher return on the idle cash balance. Accordingly, in April 2020, Business Solutions makes the following investments in trading securities

Apr.		16		Purchases Johnson & Johnson bonds for $8,000.
Apr.		30		Purchases notes of Starbucks for $4,200.

On June 30, 2020, the fair value of the Johnson & Johnson bonds is $14,700 and the Starbucks notes is $3,700.

Required:
1. Prepare journal entries to record the April purchases of trading securities by Business Solutions.
2. On June 30, 2020, prepare the adjusting entry to record any necessary fair value adjustment to its portfolio of trading securities.

Solutions

Expert Solution

Business solutions has a huge cash balance and wants to invest in the market to get a higher return , so it invested in trading securities for a short term.

In case when trading securities are held, they are recorded first at cost , then any adjustment needs to be booked through unrealised gain/loss in the income statement.

Date	Accounts and Explanation	Debit	Credit
2020
April .16	Short term investment - Bonds	$8,000
	Cash		$8,000
	( To record purchase of bonds for trading purpose)

April .30	Short tem investment - Notes	$4,200
	Cash		$4,200
	( To record purchase of notes for short term purpose)

Further in case, of the fair value adjustment, two methods are used, directly as the value of the investment , or an sepreate account named fair value adjustment account, here tthe fair value adjustment account is used:

Here the gain on bonds = $ 14700 - 8000 = $ 6700.

here the loss on holding of Notes = $ 3700 - 4200 = $500

Date	Accounts and Explanation	Debit	Credit
2020
June .30	Fair Value adjustment account	$6,700
	Unrealised gain on Investment		$6,700
	( To record unrealised gain on investment )

June .30	Unrealised loss on Investment	$500
	Fair value adjustment account		$500
	( To record unrealised loss on investment )

ekkarill92 answered 1 year ago

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