Question

XYZ Corporation used cash surplus to invest in different types of investment. Below are the transactions and events related to the investment in 2018 and 2019.

Item	Date	Transactions / Events
	2018
1	Mar 01	Purchased 5,000 ordinary shares of NewTech. at $30.20 per share plus $1,250 broker’s fee. XYZ Corporation intended to hold the shares as long-term Available-for-sale investment (AFS).
2	Mar 31	Purchased 1,500 ordinary shares of ECar Ltd at $40.00 per share plus $600 broker’s fee. Intended to hold as long term AFS.
3	Apr 10	Purchased 10,000 ordinary shares of Good-Buy Store at $15.00 per share plus $1,500 broker’s fee. XYZ Intended to hold the investment for short term trading (Trading).
4	Jun 20	Purchased 40,000 shares of Global Link Corp. ordinary shares at $6.00 per share plus $2,400 broker’s fee. The shares owned by XYZ Corporation represent 40% of Global Link Company’s total shares issued
5	Oct 21	Sold 1,000 ordinary shares of NewTech, at $32.00 per share less a $460 broker’s fee.
6	Dec 31	Global Link Corp. reported net earnings of $100,000 for the year.
	2019
7	Feb 18	Global Link Corp. declared and paid cash dividends of 50% of its 2018 reported earnings.

Additional Information

XYZ Corporation has Financial Year End at 31 Dec. The securities were traded on the market on Dec 31, 2018 at the following prices.

NewTech $34.65,

ECar Ltd $38.00, and

Good-Buy Store $13.5.

Required:

Part A

i. Prepare journal entries to record the above transactions and events (1) to (6) occurred in 2018.  ​​​​​​​​   

ii. Prepare journal entries to account for fair value adjustment for Available-for-Sale (AFS)investments held at year end. [Show your working or calculation where appropriate] ​​​​​

iii. Prepare journal entries to record the fair value adjustment for Held-for-Trading investment at year end. [Show your working or calculation where appropriate]​​​​​​​     

(1 mark)

iv. Prepare journal entries to record the transactions/events happened in 2019.

(1 mark)

Part B

a) In accounting for unrealized gain or loss from fair value adjustment, what is the difference between Held-for-Trading and Available-for-Sale securities.  

b) Explain how investors account for equityinvestments in a company (i.e. investee) with shareholding within the range of 20% to 50%. ​

Answer 1

Part A
Question 1:
Date	Account Title and Explanation	Debit	Credit
Mar-01	Long-term investments - AFS (NT)	$152,250
	Cash (5,000 × $30.20) + $1,250		$152,250
	To record the purchase of 5,000 shares of NT
Mar-31	Long-term investments - AFS (ECL)	$60,600
	Cash (1,500 × $40) + $600		$60,600
	To record the purchase of 1,500 shares of ECL
Apr-10	Short-term investments - Trading (GBS)	$151,500
	Cash (10,000 × $15) + $1,500		$151,500
	To record the purchase of 10,000 shares of GBS
Jun-20	Long-term investments GLC	$242,400
	Cash (40,000 × $6) + $2,400		$242,400
	To record the purchase of 40,000 shares of GLC
Oct-21	Cash (1,000 × $32) − $460	$31,540
	Long-term investments - AFS (NT) (152,250 ÷ 5)		$30,450
	Gain on sale of AFS securities ((31,540 − (152,250 ÷ 5)		$1,090
	To record the sale of 1,000 shares of NT
Dec-31	Long-term investments GLC ($100,000 × 40%)	$40,000
	Earnings from Long-term investment		$40,000
	To record 40% equity in investee earnings

Question 2:
Date	Account Title and Explanation	Debit	Credit
Dec-31	Fair value adjustment - AFS securities	$13,200
	Unrealized gain - Equity (OCI)		$13,200
	To record adjustment for the gain on AFS securities
Notes:
Securities	Cost (a)	Fair Value (b)	Unrealized Gain /(Loss) (b) − (a)
NT	$121,800	$138,600	$16,800
		(4,000 × $34.65)
ECL	$60,600	$57,000	($3,600)
		(1,500 × $38)
Total	$182,400	$195,600	13,200

Question 3:
Date	Account Title and Explanation	Debit	Credit
Dec-31	Unrealized loss - income (10,000 × $13.5) − $151,500	$16,500
	Fair value adjustment - Trading securities		$16,500
	To record adjustment for the loss on trading securities
Question 4:
Date	Account Title and Explanation	Debit	Credit
Feb-18	Cash   ($50,000 × 40%)	$20,000
	Long-term investments GLC		$20,000
	To record share of dividends paid GLC

Part B:

Question a: Unrealized holding gain or loss is reported in income statement in the case of held-for-trading securities but unrealized gain or loss on available-for-sale securities is reported in the equity section of balance.

Question b: Equity investments with significant influence are accounted using the equity method. Under this method, investments are recorded at cost when acquired and the investor's share of earnings in the investee income is included in the investment account and cash dividends paid by investee are deducted from investment account.