In: Accounting
posting for sec times any incomplete work will be reported answer all 2 parts investment 1 to 7 and finacial statment and valution 1 to 6
You are working for The Wellington Company on temporary assignment while one of the accountants is on family leave. You have been asked to review the company’s investment journal entries and provide necessary information to the accountant preparing the financial statements.
PAGE 8
JOURNAL
ACCOUNTING EQUATION
DATE | DESCRIPTION | POST. REF. | DEBIT | CREDIT | ASSETS | LIABILITIES | EQUITY | |
---|---|---|---|---|---|---|---|---|
1 |
Jan. 17 |
Investments-Red Rock Co. Stock |
38,500.00 |
? |
||||
2 |
Cash |
38,500.00 |
? |
|||||
3 |
Feb. 5 |
Investments-Sunset Village Bonds |
35,000.00 |
? |
||||
4 |
Interest Receivable |
300.00 |
? |
|||||
5 |
Cash |
35,300.00 |
? |
|||||
6 |
23 |
Investments-Mays and Co. Stock |
26,250.00 |
? |
||||
7 |
Cash |
26,250.00 |
? |
|||||
8 |
Mar. 31 |
Cash |
350.00 |
? |
||||
9 |
Interest Receivable |
300.00 |
? |
|||||
10 |
Interest Revenue |
50.00 |
? |
|||||
11 |
Apr. 6 |
Investment in Minions Corp. Stock |
175,000.00 |
? |
||||
12 |
Cash |
175,000.00 |
? |
|||||
13 |
30 |
Cash |
750.00 |
? |
||||
14 |
Dividend Revenue |
750.00 |
? |
|||||
15 |
Jul. 1 |
Cash |
18,690.00 |
? |
||||
16 |
Loss on Sale of Investment |
2,520.00 |
? |
|||||
17 |
Interest Revenue |
210.00 |
? |
|||||
18 |
Investments-Sunset Village Bonds |
21,000.00 |
? |
|||||
19 |
Aug. 14 |
Cash |
41,300.00 |
? |
||||
20 |
Gain on Sale of Investments |
1,800.00 |
? |
|||||
21 |
Investments-Harding Construction Stock |
39,500.00 |
? |
|||||
22 |
27 |
Cash |
3,500.00 |
? |
||||
23 |
Investment in Minions Corp. Stock |
3,500.00 |
? |
|||||
24 |
Sep. 22 |
Cash |
29,750.00 |
? |
||||
25 |
Gain on Sale of Investments |
3,500.00 |
? |
|||||
26 |
Investments-Mays and Co. Stock |
26,250.00 |
? |
|||||
27 |
30 |
Cash |
140.00 |
? |
||||
28 |
Interest Revenue |
140.00 |
? |
|||||
29 |
Nov. 1 |
Investment in Minions Corp. Stock |
15,750.00 |
? |
||||
30 |
Income of Minions Corp. |
15,750.00 |
? |
|||||
31 |
Dec. 31 |
Unrealized Loss on Available-For-Sale Investments |
3,275.00 |
? |
||||
32 |
Valuation Allowance for Available-For-Sale Investments |
3,275.00 |
? |
|||||
33 |
31 |
Valuation Allowance for Trading Investments |
2,150.00 |
? |
||||
34 |
Unrealized Gain on Trading Investments |
2,150.00 |
? |
Investments
Review the journal entries on The Wellington Company panel then answer the following questions.
1. | Which item is likely to be a trading security? Mays and Co. Why? |
2. | How are brokerage commission fees treated on stock sales vs. stock purchases? |
3. | Based on these journal entries, what is the company’s investment in Sunset Village bonds at the end of the year? |
4. | The journal entry on Aug. 27 most likely shows |
5. | As an investment, bonds are always categorized as |
6. | What is the company’s investment in Minions Corp. at the end of the year? |
7. Which of the following investments are likely to be available-for-sale securities? Check all that apply.
Harding Construction stock
Mays and Co. stock
Cannot be determined
Red Rock Co. stock
Sunset Village bonds
Minions Corp. stock
Financial Statements and Valuation
The accountant preparing the financial statements has asked you to provide the fair value as of the end of the year for the investments. Present the information as it would be shown on the financial statements. Last year, The Wellington Company reported costs of $68,000 in trading investments and $82,000 in available-for-sale investments. Refer to the journal entries shown on The Wellington Company panel. Assume that all investments sold during this year were trading investments and that purchases during the year were new investments.
1. Select the correct label for each line and fill in the amount. In classifying the investments, choose a categorization which seems most likely, given the pattern of transactions in the journal entries. Enter all amounts as positive numbers. If an amount box does not require an entry, leave it blank.
Trading Securities | |
Available-For-Sale Securities | |
2. Where on the balance sheet do trading securities appear? | |
3. Where is the gain or loss from the change in value of available-for-sale securities reported in the financial statements? | |
4. Where are held-to-maturity securities reported? Based on the journal entries for this year, does the company have any held-to-maturity securities? | |
5. Where are securities held for strategic reasons reported in the financial statements when using the equity method? Based on the journal entries for this year, does The Wellington Company have any equity securities? |
6. Which of the following items does not affect net income? Check all that apply.
only unrealized gains or losses for all investments
realized loss on available-for-sale securities
realized gain on trading securities
none of these answers is correct
both gains and losses of any sort for all investments
unrealized loss on trading securities
unrealized gain on available-for-sale securities
1. Trading security reefers to the shares purchased with the intention of sale inside a short period of time say less than one year. In the given question, stock of Mays and Co. is a trading security since the same are sold within one year of purchase.
2. Brokerage expenses fees paid on the stock sales is deducted from the cash received on sale of such stock to calculate the net gain or loss. And the Brokerage expenses fees on stock purchases is added to the overall cost of stocks to book them in the accounts.
3. Sunset Village bonds are available for sale Investments as part of such bonds is already sold before the maturity. Therefore, these are required to be recorded at fair market value of such investments.
Book Value of Sunset Village bonds = $34,000 - $18,700 = $15,300
Unrealized Loss on Available-For-Sale Investments = $3,275
Value of Investment in Sunset Village bonds = $15,300 - $3,275 = $12,025
4. August 27 entry shows Dividend received on Investment in Minions Corp. Stock. This is because when a corporation receives dividend for the investment in another company's stocks, then the investor company book value of such investment is reduced by the amount of dividend received for such stock. Moreover, same cannot be considered as sale of investment as there is no profit or loss booked by the company in this journal entry.