91Ó°ÊÓ

(Equity Securities Entries) Aranda Corporation made the following cash purchases of securities during 2017,

which is the first year in which Arantxa invested in securities.

1. On January 15, purchased 10,000 shares of Sanchez Company’s common stock at \(33.50 per share plus commission \)1,980.

2. On April 1, purchased 5,000 shares of Vicario Co.’s common stock at \(52.00 per share plus commission \)3,370.

3. On September 10, purchased 7,000 shares of WTA Co.’s preferred stock at \(26.50 per share plus commission \)4,910.

On May 20, 2017, Aranda sold 4,000 shares of Sanchez Company’s common stock at a market price of \(35 per share less brokerage

commissions, taxes, and fees of \)3,850. The year-end fair values per share were Sanchez \(30, Vicario \)55, and WTA $28. In addition,

the chief accountant of Aranda told you that the corporation plans to hold these securities for the long-term but may sell them in

order to earn profits from appreciation in prices. The equity method of accounting is not appropriate for these stock purchases.

Instructions

(a) Prepare the journal entries to record the above three security purchases.

(b) Prepare the journal entry for the security sale on May 20.

(c) Compute the unrealized gains or losses and prepare the adjusting entries for Aranda on December 31, 2017.

Step by step solution

01

Entry of purchase of stocks

2017	Particulars	Debit	Credit
January 15	Equity Investment	$336,980
	Cash		$336,980
	(Being purchase of common stock)
April 1	Equity Investment	$263,370
	Cash		$263,370
	(Being purchase of common stock)
September 10	Equity Investment	$190,410
	Cash		$190,410
	(being Purchase of preferred stock)

Working notes:

$\begin{array}{c}\mathbf{Purchase}\mathbf{}\mathbf{Price}\mathbf{}\mathbf{from}\mathbf{}\mathbf{Sanchez}\mathbf{=}(\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Shares}\mathbf{×}\mathbf{Price}\mathbf{}\mathbf{Per}\mathbf{}\mathbf{Share})\mathbf{+}\mathbf{Commission}\\ \mathbf{=}(\mathbf{10}\mathbf{,}\mathbf{000}\mathbf{×}\mathbf{\$}\mathbf{33}\mathbf{.}\mathbf{50})\mathbf{+}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{980}\\ =\$336,980\end{array}$

$\begin{array}{c}\mathbf{Purchase}\mathbf{}\mathbf{Price}\mathbf{}\mathbf{from}\mathbf{}\mathbf{Vicario}\mathbf{=}(\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Shares}\mathbf{×}\mathbf{Price}\mathbf{}\mathbf{Per}\mathbf{}\mathbf{Share})\mathbf{+}\mathbf{Commission}\\ \mathbf{=}(\mathbf{5}\mathbf{,}\mathbf{000}\mathbf{×}\mathbf{\$}\mathbf{52})\mathbf{+}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{370}\\ =\$263,370\end{array}$

$\begin{array}{c}\mathbf{Purchase}\mathbf{}\mathbf{Price}\mathbf{}\mathbf{from}\mathbf{}\mathbf{WTA}\mathbf{=}(\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Shares}\mathbf{×}\mathbf{Price}\mathbf{}\mathbf{Per}\mathbf{}\mathbf{Share})\mathbf{+}\mathbf{Commission}\\ \mathbf{=}(\mathbf{7}\mathbf{,}\mathbf{000}\mathbf{×}\mathbf{\$}\mathbf{26}\mathbf{.}\mathbf{50})\mathbf{+}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{910}\\ =\$190,410\end{array}$

02

Entry of the sale of stock

2017	Particulars	Debit	Credit
May 20	Cash	$136,150
	Equity Investment		$134,792
	Gain on sale of stock		$1,358
	(Being entry of sale of stock)

Working notes:

$\begin{array}{c}\mathbf{Net}\mathbf{}\mathbf{Proceeds}\mathbf{=}(\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Shares}\mathbf{×}\mathbf{Market}\mathbf{}\mathbf{Price}\mathbf{}\mathbf{Per}\mathbf{}\mathbf{Share})\mathbf{-}\mathbf{Commission}\mathbf{}\mathbf{and}\mathbf{}\mathbf{Taxes}\\ \mathbf{=}(\mathbf{4}\mathbf{,}\mathbf{000}\mathbf{×}\mathbf{\$}\mathbf{35})\mathbf{-}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{850}\\ =\$136,150\end{array}$

$\begin{array}{c}\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Stock}\mathbf{=}\mathbf{Purchase}\mathbf{}\mathbf{Price}\mathbf{×}\frac{\mathrm{Number}\mathrm{of}\mathrm{Shares}}{\mathrm{Total}\mathrm{Number}\mathrm{of}\mathrm{Shares}}\\ \mathbf{=}\mathbf{\$}\mathbf{336}\mathbf{,}\mathbf{980}\mathbf{×}\frac{4,000}{10,000}\\ =\$134,792\end{array}$

$\begin{array}{c}\mathrm{Gain}\mathrm{on}\mathrm{Sale}\mathrm{of}\mathrm{Stock}=\mathrm{Net}\mathrm{Proceeds}-\mathrm{Cost}\mathrm{of}\mathrm{Stock}\\ =\$136,150-\$134,792\\ =\$1,358\end{array}$

03

Entry of the fair value adjustment

2017	Particulars	Debit	Credit
December 31	Unrealized Gain/loss- Income	$4,968
	Fair Value Adjustment ($655,968 - $651,000)		$4,968
	(Being entry of fair value adjustment)

Working notes:

$\begin{array}{c}\mathrm{Total}\mathrm{Cost}=\mathrm{Cost}\mathrm{of}\mathrm{Sanchez}+\mathrm{Cost}\mathrm{of}\mathrm{Vicario}+\mathrm{Cost}\mathrm{of}\mathrm{WTA}\\ =\$202,188+\$263,370+\$190,410\\ =\$655,968\end{array}$

$\begin{array}{c}\mathrm{Fair}\mathrm{Value}=\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{Sanchez}+\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{Vicario}+\mathrm{Fair}\mathrm{Value}\mathrm{of}\mathrm{WTA}\\ =\$180,000+\$275,000+\$190,000\\ =\$651,000\end{array}$

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