91Ó°ÊÓ

EXCEL (Equity Securities Entries and Disclosures) Parnevik Company has the following securities in its

investment portfolio on December 31, 2017 (all securities were purchased in 2017): (1) 3,000 shares of Anderson Co. common

stock which cost \(58,500, (2) 10,000 shares of Munter Ltd. common stock which cost \)580,000, and (3) 6,000 shares of King Company

preferred stock which cost \(255,000. The Fair Value Adjustment account shows a credit of \)10,100 at the end of 2017.

In 2018, Parnevik completed the following securities transactions.

1. On January 15, sold 3,000 shares of Anderson’s common stock at \(22 per share less fees of \)2,150.

2. On April 17, purchased 1,000 shares of Castle’s common stock at \(33.50 per share plus fees of \)1,980.

On December 31, 2018, the market prices per share of these securities were Munter \(61, King \)40, and Castle $29. In addition, the

accounting supervisor of Parnevik told you that, even though all these securities have readily determinable fair values, Parnevik

will not actively trade these securities because the top management intends to hold them for more than one year.

Instructions

(a) Prepare the entry for the security sale on January 15, 2018.

(b) Prepare the journal entry to record the security purchase on April 17, 2018.

(c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on December 31, 2018.

(d) How should the unrealized gains or losses be reported on Parnevik’s income statement and balance sheet?

Step by step solution

01

Entry for the sale of securities

Date	Particulars	Debit	Credit
January 15, 2018	Cash	$63,850
	Gain on sale of securities		$5,350
	Equity investment		$58,500
	(Being entry for the sale of securities)

02

Entry for the purchase of securities

Date	Particulars	Debit	Credit
April 17, 2018	Equity Investment	$35,480
	Cash		$35,480
	(Being entry for the purchase of securities

03

Fair value adjustment of securities

Date	Particulars	Debit	Credit
December 31, 2018	Unrealized holding loss	$10,000
	Fair value adjustment		$10,000
	(Being entry for the fair value adjustment of securities)

04

Treatment of unrealized income and losses in the financial statements

In the balance sheet, unrealized gains and losses are recorded in the other comprehensive incomeunder the head of owner’s equity.

Unrealized gains and losses are not recognized until securities are sold in the income statement.

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