Question

Question 2
ROA Limited purchased the following trading securities on 1 January 2018. Cost and fair values are shown below:

Cost		Fair value		Fair value
1 January 2018		31 December 2018		31 December 2019
BTS Limited (15,000 shares)	$29 per share		$25 per share		$28 per share
LK Limited (2,000 shares)	$105 per share		$108 per share		$110 per share

Required:
a. Calculate total cost on 1 January 2018, total fair value on 31 December 2018 and total fair value on 31 December 2019.

b. Prepare the journal entry to record the purchase of the equity investments on 1 January 2018.

c. Prepare the journal entry to record the fair value adjustment on 31 December 2018.

d. Prepare the journal entry to record the fair value adjustment on 31 December 2019.

Answer 1

a)

BTS Limited

Total fair value on 1^st January 2018 is (29*15000) =$ 435,000

Total fair value on 31^st December 2018 is (25*15000) =$ 375,000

Total fair value on 31^st December 2019 is (28*15000) =$ 420,000

LK Limited

Total fair value on 1^st January 2018 is (105*2000) =$ 210,000

Total fair value on 31^st December 2018 is (108*2000) =$ 216,000

Total fair value on 31^st December 2019 is (110*2000) =$ 220,000

b) Equity investments on 1 January 2018.

Journal entry	Debit	Credit
BTS Limited a/c Dr	$      4,35,000
To cash a/c		$    4,35,000
( 15000 shares of BTS limit purchased with cash 29 by ROA limited )
LK Limited a/c Dr	$      210,000
To cash a/c		$    210,000
( 2000 shares of LK limit purchased at with cash 105 by LK limited )
	$      645,000	$    645,000

The total value of shares purchased by ROA limited is $ 645,000

C) Fair value adjustment on 31 December 2018.

Journal entry	Debit	Credit
Profit & loss a/c Dr	$       -60,000
To BTS Limited a/c		$      -60,000
( 15000 shares of BTS limit fair value 25 on 31-12-2018, a loss of $60,000 )
Profit & loss a/c Dr	$           6,000
To LK Limited a/c		$         6,000
( 2000 shares of BTS limit fair value 108 on 31-12-2018, the profit of $6,000 )
	$       -54,000	$      -54,000

The profit and loss on shares purchased by ROA limited on 1^st January 2018 is a loss of $ 54,000 as of 31 December 2018.

d) Fair value adjustment on 31 December 2019.

Journal entry	Debit	Credit
Profit & loss a/c Dr	$       -15,000
To BTS Limited a/c		$      -15,000
( 15000 shares of BTS limit fair value 28 on 31-12-2019, a loss of $15,000)
Profit & loss a/c Dr	$         10,000
To LK Limited a/c		$       10,000
( 2000 shares of BTS limit fair value 110 on 31-12-2019, the profit of &10,000 )
	$         -5,000	$        -5,000

The profit and loss on shares purchased by ROA limited on 1^st January 2018 is a loss of $ 5,000 as of 31 December 2019.