Question

please don't skip any step/part or give me half answer I'll rate

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? 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

Answer 1

1. Trading security referes to the shares purchased with the intention of sale within a short period of time say less than one year. In the given question, stock of Mays and Co. is a trding security since the same are sold within one year of purchase.

2. Brokerage commission 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 commission 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 Invesments as part of such bonds is already sold before the maturity. Therefore, these are required to be recorded at fair market value of such invenstments.

Book Value of  Sunset Village bonds = $34,000 - $18,700 = $15,300

Unrealized Loss on Available-For-Sale Investments = $3,275

Value of Invesment 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 invenstment in another company's stocks, then the investor company book value of such investment is reduced by the amount of devidend 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.