Question

Kirkland Company had no trading debt securities prior to this year. It had the following transactions this year involving trading debt securities.

Aug.		2		Purchased Verizon bonds for $32,000.
Sept.		7		Purchased Apple bonds for $57,000.
		12		Purchased Mastercard bonds for $42,000.
Oct.		21		Sold some of its Verizon bonds that had cost $3,100 for $3,200 cash.
		23		Sold some of its Apple bonds that had cost $37,000 for $37,400 cash.
Nov.		1		Purchased Walmart bonds for $62,000.
Dec.		10		Sold all of its Mastercard bonds for $40,000 cash.

Required

1. Prepare journal entries to record these transactions.
2. Prepare a table to compare the year-end cost and fair values of its trading debt securities. Year-end fair values: Verizon, $30,500; Apple, $33,000; and Walmart, $50,000.
3. Prepare the adjusting entry to record the year-end fair value adjustment for the portfolio of trading debt securities.

Answer 1

(1)Journal Entries to record the transaction of purchasing and selling bonds

Date:2 August

Dr. Investment in Verizon bond account 32000

Cr. Cash account 32000

(purchase of bonds for cash)

Date: 7 September

Dr. Investment in Apple bond account 57000

Cr. Cash account 57000

(purchase of bonds for cash)

Date: 12 September

Dr. Investment in Mastercard bond account 42000

Cr. Cash account 42000

(purchase of bonds for cash)

Date: 21 October

Dr. Cash 32000

Cr. Investment in Verizon bond account 31000

Cr. Profit and Loss account 1000

(bonds sold at a profit of 1000)

Date: 23 October

Dr. Cash account 37400

Cr. Investment in Apple bonds 37000

Cr. Profit and Loss account 400

(bonds sold at a profit of 400)

Date: 1 November

Dr. Investment in Walmart bonds account 62000

Cr. Cash account 62000

(purchase of bonds for cash)

Date: 10 December

Dr. Cash account 40000

Dr. Profit and Loss account 2000

Cr. Investment in Mastercard account 42000

( bond sold at a loss of 2000)

(2) Table for Cost and Fair Values for Kirkland portfolio

investment in bond	cost of investment in year end	fair value of investment on year end	unrealized gain
Verizon	28900	30500	1600
Apple	20000	33000	13000
Walmart	62000	50000	(12000)

calculation of cost of bond

cost of bond equal = Bonds purchased - cost of bond during sale

Verizon bond =32000 - 3100 which is 28900 gain

Apple bond = 57000 - 37000 which is 20000 gain

Walmart bond = 50000 - 62000 which is 12000 loss hence it is shown in brackets in the table above

(3) Adjusting Journal entries to record year end fair value of the portfolio

To record the increase in fair value a new account that is unrealized gain is created which is shown in balance sheet. Any increase in the fair value is added in the unrealized gain account. when the fair value of bond is less than the cost then we recorded in the unrealized loss account. In the end of the year the unrealized loss in deducted from unrealized gain to record in the balance sheet of a company under the head shareholders fund and subhead is unrealized gain/loss

Date: 31 December

Dr. Investment in Verizon bonds account 1600

Cr. Unrealized Gain account 1600

(unrealized gain on bonds recorded)

Date: 31 December

Dr. Investment in Apple Bonds 20000

Cr. Unrealized Gain account 20000

(unrealized gain on bonds recorded)

Date: 31 December

Dr. Unrealized Loss account 12000

Cr. Investment in Walmart bond account 12000

(unrealized loss on bonds recorded)

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