Question

In: Accounting

Progressive Inc. (Progressive) is an investment company that recently raised $3,000,000 from a public financing. The...

Progressive Inc. (Progressive) is an investment company that recently raised $3,000,000 from a public financing. The Board of Directors has instructed the CFO to invest up to $2,000,000 in investments that it intends to actively trade and therefore will account for these investments at fair value through profit or loss.

On the advice of the company’s investment advisor, the following shares were purchased in October 2019:

Investment

# of shares

Total cost $

Giant Inc

25,000

1,000,000

Monarch Bank of Canada

20,000

600,000

Leslee Resources Ltd/

100,000

200,000

During December 2019, Progressive received cash dividends of $40,000 from its investment in Monarch Bank of Canada.

In 2020, the following transactions took place:

January 25 50,000 shares of Leslee Resources Ltd. were purchased for $125,000.

May 17 6,000 shares of Monarch Bank of Canada were sold at $45 per share

June 17 75,000 shares of Lucky Limited were purchased at $15 per share

September 25 100,000 shares of Leslee Resources Ltd. were sold for net proceeds (i.e. after commissions) for $165,000. (For the purposes of determining the cost of shares sold, use the weighted average cost).

As part of its banking arrangement, the company pays no commissions on the purchase of shares but is charged a 2% commission on the sale of all investments.

Market Price of investments – presented on a per share basis

Investment

January 1,

2019

December

31, 2019

December 31,

2020

Giant Inc

$110.00

$105.00

$130.00

Monarch Bank of Canada

27.00

39.00

43.00

Leslee Resources Ltd

1.50

1.75

0.75

Lucky Limited

9.00

13.00

16.00

Required:

a) Prepare all journal entries relating to these investments for 2019.

b) Prepare all journal entries relating to these investments for 2020.

c) Briefly discuss why these investments are valued at current market value while other assets such as property, plant and equipment are not adjusted to fair market value.

Solutions

Expert Solution

a.) Journal Entries for 2019:-
Date Account Titles Debit Credit
October ,2019 Investment in Gaint Inc        1,000,000
Cash 1,000,000
October ,2019 Investment in Monarch Bank of Canada          600,000
Cash    600,000
October ,2019 Investment in Laslee resources Ltd.          200,000
Cash    200,000
December ,2019 Cash             40,000
Dividend revenue        40,000
December 31,2019 Investment in Gaint Inc        1,625,000
Increase in Fair Value-Income Statement 1,625,000
( 2,625,000 - 1,000,000 )
December 31,2019 Investment in Monarch Bank of Canada          180,000
Increase in Fair Value-Income Statement    180,000
( 780,000 - 600,000 )
December 31,2019 Decrease in Fair Value-Income Statement             25,000
Investment in Laslee resources Ltd.        25,000
(200,000 - 175,000 )
b.) Journal Entries for 2020:-
Date Account Titles Debit Credit
January 25,2020 Investment in Laslee resources Ltd.          125,000
Cash    125,000
May 17,2020 Cash (6,000 x 45 ) - ( 6,000 x 2% x 45 )          264,600
Investment in Monarch Bank of Canada    234,000
(6,000 x 39 )
Gain on sales        30,600
June 17,2020 Investment in Lucky Ltd.( 75,000 x 15 )        1,125,000
Cash 1,125,000
September 25,2020 Cash          165,000
Loss on sales             35,000
Investment in Laslee resources Ltd.    200,000
(( 175,000 + 125,000 ) /150,000) x 100,000
December 31,2020 Investment in Gaint Inc          625,000
Increase in Fair Value-Income Statement    625,000
(25,000 x 130 ) - 2,625,000
December 31,2020 Investment in Monarch Bank of Canada             56,000
Increase in Fair Value-Income Statement        56,000
(14,000 x 43 ) - 546,000
December 31,2020 Decrease in Fair Value-Income Statement             62,500
Investment in Laslee resources Ltd.        62,500
100,000 - (50,000 x 0.75 )
December 31,2020 Investment in Lucky Ltd.             75,000
Increase in Fair Value-Income Statement        75,000
(75,000 x 16 ) - 1,125,000
C.) As these investments are available for trade, hence they are value at fair value through Profit & loss accounts as per IFRS 9-Financial Instruments. Whereas other assets are not adjustment for fair value. Their revaluation is dealt in IAS-16, Property, Plant & Equipments.

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