ACCTMIS 2000 Lecture Notes - Lecture 9: Income Statement, Equity Method
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Accounting for Investments
In 2013, Western Community Hospital, a private facility, receives donated securities with a fair market value and face value of $400,000. The donor specifies that the securities be held as a permanent endowment, and investment income earned on these securities can be used for any purpose. The securities have a fair market value of $360,000 at the end of 2013, and $450,000 at the end of 2014. Dividend income earned on the securities in each of the two years is $10,000
Required
a. Prepare the journal entries to record the above events in 2013 and 2014. Indicate the balance of each account and its placement in the financial statements.
2013 Journal Entries
General Journal | ||
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Description | Debit | Credit |
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
To record the contribution. | ||
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
To record the investment income. | ||
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
To record the change in value of securities. |
Use a negative sign with unrealized gain (loss) answer to indicate an unrealized loss.
Account balances at the end of 2013 | ||
---|---|---|
Investment in securities | $Answer | AnswerAsset in statement of financial positionIncrease in permanently restricted net assets on statement of activitiesIncrease in unrestricted net assets on statement of activitiesIncrease in permanently restricted net assets on statement of activitiesDecrease in permanently restricted net assets on statement of activitiesDecrease in unrestricted net assets on statement of activities |
Contributions | $Answer | AnswerAsset in statement of financial positionIncrease in permanently restricted net assets on statement of activitiesIncrease in unrestricted net assets on statement of activitiesIncrease in permanently restricted net assets on statement of activitiesDecrease in permanently restricted net assets on statement of activitiesDecrease in unrestricted net assets on statement of activities |
Investment income | $Answer | AnswerAsset in statement of financial positionIncrease in permanently restricted net assets on statement of activitiesIncrease in unrestricted net assets on statement of activitiesIncrease in permanently restricted net assets on statement of activitiesDecrease in permanently restricted net assets on statement of activitiesDecrease in unrestricted net assets on statement of activities |
Unrealized gain (loss) | $Answer | AnswerAsset in statement of financial positionIncrease in permanently restricted net assets on statement of activitiesIncrease in unrestricted net assets on statement of activitiesIncrease in permanently restricted net assets on statement of activitiesDecrease in permanently restricted net assets on statement of activitiesDecrease in unrestricted net assets on statement of activities |
2014 Journal Entries
General Journal | ||
---|---|---|
Description | Debit | Credit |
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
To record the investment income. | ||
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
To record the change in value of the securities. |
Use a negative sign with unrealized gain (loss) answer to indicate an unrealized loss.
Account balances at the end of 2014 | ||
---|---|---|
Investment in securities | $Answer | AnswerAsset in statement of financial positionIncrease in permanently restricted net assets on statement of activitiesIncrease in unrestricted net assets on statement of activitiesIncrease in permanently restricted net assets on statement of activitiesDecrease in permanently restricted net assets on statement of activitiesDecrease in unrestricted net assets on statement of activities |
Investment income | $Answer | AnswerAsset in statement of financial positionIncrease in permanently restricted net assets on statement of activitiesIncrease in unrestricted net assets on statement of activitiesIncrease in permanently restricted net assets on statement of activitiesDecrease in permanently restricted net assets on statement of activitiesDecrease in unrestricted net assets on statement of activities |
Unrealized gain (loss) | $Answer | AnswerAsset in statement of financial positionIncrease in permanently restricted net assets on statement of activitiesIncrease in unrestricted net assets on statement of activitiesIncrease in permanently restricted net assets on statement of activitiesDecrease in permanently restricted net assets on statement of activitiesDecrease in unrestricted net assets on statement of activities |
Required
b. Assume the same facts as above, except the donation was $400,000 in cash, and the hospital invested the $400,000 in debt securities. How do the entries in a. change?
General Journal | ||
---|---|---|
Description | Debit | Credit |
2013 entries: | ||
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
To record the contribution. | ||
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
To record the investment in securities. | ||
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
To record the change in value of securities. | ||
2014 entries: | ||
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
AnswerInvestment in securitiesContributions (PR)CashInvestment income (UR)Unrealized loss (PR)Unrealized gain (PR)Restricted cashUnrealized loss (UR)Unrealized gain (UR) | Answer | Answer |
To record the change in value of the securities. |
Hurricane Inc. purchased a portfolio of available-for-sale securities in 2016, its first year of operations. The cost and fair value of this portfolio on December 31, 2016, was as follows:
1 | Name | Number of Shares | Total Cost | Total Fair Value |
2 | Tornado Inc. | 830.00 | $14,857.00 | $16,185.00 |
3 | Tsunami Corp. | 1,230.00 | 31,488.00 | 34,809.00 |
4 | Typhoon Corp. | 2,170.00 | 44,268.00 | 43,834.00 |
5 | Total | $90,613.00 | $94,828.00 |
On June 12, 2017, Hurricane purchased 1,400 shares of Rogue Wave Inc. at $50 per share plus a $80 brokerage commission.
Required:
A. | Provide the journal entries to record the following (refer to the Chart of Accounts for exact wording of account titles and be sure to enter the year as part of the date):
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B. | How are unrealized gains and losses treated differently for available-for-sale securities than for trading securities? |
Chart of Accounts
CHART OF ACCOUNTS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hurricane Inc. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
General Ledger | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Journal
Shaded cells have feedback.
A. Provide the journal entries. Refer to the Chart of Accounts for exact wording of account titles. Be sure to enter the year as part of the date.
How does grading work?
PAGE 10
JOURNAL
Score: 33/51
DATE | DESCRIPTION | POST. REF. | DEBIT | CREDIT | |
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1 | ? | ? | |||
2 | ? | ||||
3 | ? | ? | |||
4 | ? |
Points:
6.47 / 10
Feedback
Check My Work
1. The gain or loss is the difference between the portfolio cost and its fair value. The offset account for the gain or loss entry is the valuation allowance account.
2. Increase the investment and decrease Cash for the purchase price (Shares x Per share amount) plus brokerage fee.
Final Question
Shaded cells have feedback.
B. How are unrealized gains and losses treated differently for available-for-sale securities than for trading securities?
Unrealized gains and losses for available-for-sale securities are accumulated over time and reported as a credit (positive) or debit (negative) balance in the Stockholdersâ Equity section. As a result, the changes in fair valueare not reflected on the income statement, as is the case with trading securities. Bypassing the income statement issupported on the grounds that available-for-sale securities will be held for alonger time than trading securities; thus, fluctuations in market prices havea greater opportunity to âcancel outâ over time.
Points:
5 / 5