Six Months Ago, A Company Purchased An Investment In Stock.
Ix Months Ago A Company Purchased An Investment In Stock For 72000
Ix months ago, a company purchased an investment in stock for $72,000. The investment is classified as available-for-sale securities. The current fair value of the stock is $76,200. The company should record a:
- Debit to Investment Revenue for $4,200.
- Credit to Investment Revenue for $4,200.
- Credit to Unrealized Gain-Equity for $4,200.
- Credit to Market Adjustment - Available-for-Sale for $4,200.
- Debit to Unrealized Loss-Equity for $4,200.
On February 15, Seacroft buys 6,500 shares of Kebo common stock at $28.68 per share plus a brokerage fee of $400. The stock is classified as available-for-sale securities. On March 15, Kebo declares a dividend of $1.20 per share payable to stockholders of record on April 15. Seacroft received the dividend on April 25 and ultimately sells half of the Kebo stock on November 17 of the current year for $29.45 per share less a brokerage fee of $250. The journal entry to record the dividend on April 25 is:
- Debit Cash $7,800; credit Gain on Sale of Investments $7,800.
- Debit Cash $7,800; credit Interest Revenue $7,800.
- Debit Cash $7,800; credit Dividend Revenue $7,800.
- Debit Cash $6,911; credit Dividend Revenue $6,911.
- Debit Cash $6,911; credit Interest Revenue $6,911.
A company owns 9% bonds with a par value of $100,000 that pay interest on October 1 and April 1. The amount of interest accrued on December 31 (the company's year-end) would be:
- $750.
- $2,250.
- $4,500.
- $9,000.
- $1,500.
On February 15, Seacroft buys 7,200 shares of Kebo common at $28.55 per share plus a brokerage fee of $410. The stock is classified as available-for-sale securities. On March 15, Kebo declares a dividend of $1.17 per share payable to stockholders of record on April 15. Seacroft received the dividend on April 25 and ultimately sells half of the Kebo stock on November 17 of the current year for $29.32 per share less a brokerage fee of $260. The fair value of the remaining shares is $29.52 per share. The amount that Seacroft should report in the equity section of its year-end December 31 balance sheet for its investment in Kebo is:
- $3,287.
- $2,307.
- $6,574.
- $10,731.
- $8,424.
On February 15, Seacroft buys 6,000 shares of Kebo common at $28.73 per share plus a brokerage fee of $495. The stock is classified as available-for-sale securities. On March 15, Kebo declares a dividend of $1.25 per share payable to stockholders of record on April 15. Seacroft received the dividend on April 25 and ultimately sells half of the Kebo stock on November 17 of the current year for $29.50 per share less a brokerage fee of $350. The fair value of the remaining shares if $29.70 per share. The amount that Seacroft should report in the asset section of its year-end December 31 balance sheet for its investment in Kebo is:
- $1,712.
- $5,610.
- $89,100.
- $172,875.
- $2,662.
On February 15, Seacroft buys 6,400 shares of Kebo common stock at $28.69 per share plus a brokerage fee of $475. The stock is classified as available-for-sale securities. On March 15, Kebo declares a dividend of $1.21 per share payable to stockholders of record on April 15. Seacroft received the dividend on April 25 and ultimately sells half of the Kebo stock on November 17 of the current year for $29.46 per share less a brokerage fee of $330. The fair value of the remaining shares is $29.66 per share. The amount that Seacroft should report on its year-end December 31 income statement related to the investment in Kebo is:
- $2,866.
- $9,640.
- $1,896.
- $5,610.
- $7,744.
Paper For Above instruction
Ix Months Ago A Company Purchased An Investment In Stock For 72000
Investments in securities are a common component of corporate asset management strategies, especially for companies looking to optimize returns on surplus cash or diversify their investment portfolios. When a company invests in stock, the accounting classification—such as available-for-sale, trading, or held-to-maturity—determines how the investment is reported on financial statements. In this context, the scenario involves a purchase of stock classified as available-for-sale securities, a classification that impacts how unrealized gains and losses are reported.
The company purchased stock for $72,000, which has appreciated to a fair value of $76,200. Since the stock is classified as available-for-sale, the unrealized gain of $4,200 ($76,200 - $72,000) should be recognized in other comprehensive income rather than net income. Consequently, the appropriate accounting entry would involve crediting an unrealized gain account within equity, such as 'Unrealized Gain-Available-for-Sale Securities.' This treatment aligns with accounting standards (ASC 320 and IAS 39) that require unrealized gains and losses on available-for-sale securities to be reported in a separate component of equity until realized.
The correct journal entry to reflect the increase in fair value is a credit to 'Unrealized Gain-Available-for-Sale Securities' for $4,200, signaling an unrealized gain. This does not affect net income at this stage but increases the fair value of the investment recorded on the balance sheet in the asset section. When or if the securities are sold in the future, the realized gain or loss will then impact net income.
Furthermore, when subsequent transactions occur—such as dividends received, sales of securities, or further fluctuations in fair value—disclosure and accounting method follow specific guidance. For example, dividends would be recognized as dividend income, while gains or losses from sales are recognized in net income, and changes in fair value in other comprehensive income.
In sum, for the initial question, the company should record a journal entry creditting 'Unrealized Gain-Available-for-Sale Securities' for $4,200 to reflect the increase in fair value, thereby updating the fair value of the investment and properly complying with accounting standards regarding available-for-sale securities.
Seacroft Investment Transactions and Reporting Analysis
Seacroft’s investment activities involve several transactions with shares of Kebo, including purchases, dividend receipts, sales, and valuation adjustments. Each transaction impacts financial reporting differently, depending on the classification of securities and the timing of recognition.
Initial Purchase and Fair Value Adjustment
When Seacroft acquires 6,500 shares at $28.68 per share plus a brokerage fee, the total cost is calculated by multiplying the share price by the number of shares and adding fees:
- Cost of shares = 6,500 x $28.68 = $186,420
- Plus brokerage fee = $400
- Initial recorded cost = $186,820
At year-end, the fair value of these securities is $76,200. As the securities are classified as available-for-sale, the unrealized gain of $3,780 ($76,200 - $72,420) is recognized in other comprehensive income, impacting the equity section of the balance sheet. The journal entries involve debiting the securities account and crediting 'Unrealized Gain-Available-for-Sale' in equity.
Dividend Receipt and Income Recognition
Dividends declared by Kebo at $1.20 per share result in income recognition when received. Seacroft receives:
- Total dividends = 3,250 shares (assuming half sold later) x $1.20 = $3,900, adjusted for the actual number of shares held at dividend record date.
Dividends are recognized as dividend income, a component of earnings, on the receipt date. The journal entry includes debiting cash and crediting dividend revenue or income.
Sale of Shares and Recognition of Gains
When Seacroft sells half of the shares at a profit, the sale impact depends on the original cost basis and the sale proceeds net of brokerage fees. For example, selling 3,250 shares at $29.45 per share less $250 brokerage fees results in a realized gain, which is recognized in net income.
Valuation of Remaining Investments
The remaining shares' fair value is reassessed at year-end, affecting the asset reporting on the balance sheet. An increase from the original cost basis to the current fair value increases the reported asset value and may also impact unrealized gains in equity.
Summary of Financial Impact
Overall, Seacroft’s investment accounting involves tracking purchase costs, recording dividends as income, adjusting fair values for available-for-sale securities in other comprehensive income, and recognizing gains or losses upon sale. Proper classification ensures relevant presentation in the financial statements, aligning with GAAP and IFRS standards.
Interest on Bonds
For the bonds with a par value of $100,000 paying interest twice annually, interest accrued by December 31 can be calculated. Since interest is paid semiannually on October 1 and April 1, the interest accrued over the three months (October 1 to December 31) is:
Interest per period = 9% x $100,000 / 2 = $4,500.
Interest accrued from October 1 to December 31 (3 months) = $4,500 x (3/6) = $2,250.
Thus, the accrued interest is $2,250, a figure consistent with standard accrual practices.
Conclusion
The transactions involving securities require diligent tracking of costs, fair values, dividend income, and realized gains or losses. Investment classification impacts how these are reported in financial statements. Proper understanding and application of accounting standards ensure transparent and compliant financial reporting, aiding stakeholders in evaluating the company’s financial health and investment performance.
References
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- International Accounting Standards Board (IASB). (2014). IFRS 9 Financial Instruments.
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