Question

Jack Company Purchased stock of Jill Company for $5,000 on Jan 2015. Jack plans to dump Jill as soon as possible. However, he did not do so and on December 31, 2015 he still holds the stock which is now valued at $3,000.

A.) Please consider from the point of Jack Company. How should the stock in Jill Company be categorized on purchase?

B.) What are the journal entries required on December 31, 2015 to take account of the loss in value of Jill stock?

C.) How would the loss in value be shown in the income statement?

D.) If Jack had categorized Jill stock as "available for sale", how would the loss in value be shown?

E.) Given that Jack made a loss, how should he categorize the Jill Stock. (Should it be as trading security or available for sale?)

F.) What is meant by "fair value option"?

G.) Go back to part (b). How should jack report the new value on the balance sheet?

H.) Assume that on December 31, 2016 Jack still has Jill. Her value is now $1,000. What are the required journal entries to take account on the new value?

I.) Assume that on December 31, 2017 Jack has Jill but she has appreciated in value and is worth $8,000. What are the required journal entries to take account of the new value?

Answer 1

A. Should be categorised as Held for Trading Securities.

B.

Date	Account Titles	Debit	Credit
31-Dec	Unrealised Loss on Investment	2,000.00
	Held for Trading investments		2,000.00
	(Being Investment revalued to Fair Value)

C. This loss of 2000 will be Income Statement

Income Statement (Partial)
Loss on Sale of Investment	2000

D. The Loss will be shown as Other Comprehensive Income in Income Statement.

E. It should be categorised as Available for Sale Securities.

F. It is an alternative to business to record the financial instruments at fair values.

G. It will show as Held for Trading Investment of $ 3000 under Financial Assets.

H.

Date	Account Titles	Debit	Credit
31-Dec	Unrealised Loss in Investment	2000.00
	Held for Trading investments		2,000.00
	(Being Investment revalued to Fair Value)

I.

Date	Account Titles	Debit	Credit
31-Dec	Held for Trading Investment	7000.00
	Un-realised Profit on Investment		7000.00
	(Being Investment revalued to Fair Value)

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