In: Accounting
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.
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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