Question

You are working for The Wellington Company on temporary assignment while one of the accountants is on family leave. You have been asked to review the company’s investment journal entries and provide necessary information to the accountant preparing the financial statements.

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JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1	Jan. 17	Investments-Red Rock Co. Stock		40,700.00		?
2		Cash			40,700.00	?
3	Feb. 5	Investments-Sunset Village Bonds		37,000.00		?
4		Interest Receivable		320.00		?
5		Cash			37,320.00	?
6	23	Investments-Mays and Co. Stock		27,750.00		?
7		Cash			27,750.00	?
8	Mar. 31	Cash		370.00		?
9		Interest Receivable			320.00	?
10		Interest Revenue			50.00			?
11	Apr. 6	Investment in Minions Corp. Stock		185,000.00		?
12		Cash			185,000.00	?
13	30	Cash		800.00		?
14		Dividend Revenue			800.00			?
15	Jul. 1	Cash		19,746.00		?
16		Loss on Sale of Investment		2,664.00				?
17		Interest Revenue			210.00			?
18		Investments-Sunset Village Bonds			22,200.00	?
19	Aug. 14	Cash		41,200.00		?
20		Gain on Sale of Investments			1,800.00			?
21		Investments-Harding Construction Stock			39,400.00	?
22	27	Cash		3,700.00		?
23		Investment in Minions Corp. Stock			3,700.00	?
24	Sep. 22	Cash		31,250.00		?
25		Gain on Sale of Investments			3,500.00			?
26		Investments-Mays and Co. Stock			27,750.00	?
27	30	Cash		160.00		?
28		Interest Revenue			160.00			?
29	Nov. 1	Investment in Minions Corp. Stock		22,200.00		?
30		Income of Minions Corp.			22,200.00			?
31	Dec. 31	Unrealized Loss on Available-For-Sale Investments		3,275.00				?
32		Valuation Allowance for Available-For-Sale Investments			3,275.00	?
33	31	Valuation Allowance for Trading Investments		2,150.00		?
34		Unrealized Gain on Trading Investments			2,150.00

Review the journal entries on The Wellington Company panel then answer the following questions.

1.	Which item is likely to be a trading security?   Why?
2.	How are brokerage commission fees treated on stock sales vs. stock purchases?
3.	Based on these journal entries, what is the company’s investment in Sunset Village bonds at the end of the year?
4.	The journal entry on Aug. 27 most likely shows
5.	As an investment, bonds are always categorized as
6.	What is the company’s investment in Minions Corp. at the end of the year?

7. Which of the following investments are likely to be available-for-sale securities? Check all that apply.

Minions Corp. stock

Cannot be determined

Mays and Co. stock

Red Rock Co. stock

Sunset Village bonds

Harding Construction stock

The accountant preparing the financial statements has asked you to provide the fair value

The price that would be received for selling an asset or paying off a liability, often the market price for an equity or debt security.

as of the end of the year for the investments. Present the information as it would be shown on the financial statements. Last year, The Wellington Company reported costs of $68,000 in trading investments and $82,000 in available-for-sale investments. Refer to the journal entries shown on The Wellington Company panel. Assume that all investments sold during this year were trading investments and that purchases during the year were new investments.

1. Select the correct label for each line and fill in the amount. In classifying the investments, choose a categorization which seems most likely, given the pattern of transactions in the journal entries. Enter all amounts as positive numbers. If an amount box does not require an entry, leave it blank.

Trading Securities
selector 1 ·        Plus valuation allowance for trading investments ·        Unrealized gain (loss) on trading investments ·        Trading investments at fair value ·        Trading investments at cost ·        Trading investments, net ·        Less valuation allowance for trading investments
selector 2 ·        Plus valuation allowance for trading investments ·        Trading investments, net ·        Trading investments at fair value ·        Less valuation allowance for trading investments ·        Trading investments at cost ·        Unrealized gain (loss) on trading investments
selector 3 ·        Trading investments, net ·        Plus valuation allowance for trading investments ·        Unrealized gain (loss) on trading investments ·        Trading investments at fair value ·        Trading investments at cost ·        Less valuation allowance for trading investments

Points:

Available-For-Sale Securities
selector 1 ·        Plus valuation allowance for available-for-sale investments ·        Unrealized gain (loss) on available-for-sale investments ·        Available-for-sale investments at fair value ·        Available-for-sale investments, net ·        Available-for-sale investments at cost ·        Less valuation allowance for available-for-sale investments
selector 2 ·        Available-for-sale investments at fair value ·        Plus valuation allowance for available-for-sale investments ·        Unrealized gain (loss) on available-for-sale investments ·        Available-for-sale investments, net ·        Available-for-sale investments at cost ·        Less valuation allowance for available-for-sale investments
selector 3 ·        Available-for-sale investments at cost ·        Plus valuation allowance for available-for-sale investments ·        Less valuation allowance for available-for-sale investments ·        Unrealized gain (loss) on available-for-sale investments ·        Available-for-sale investments at fair value ·        Available-for-sale investments, net

Points:

	2. Where on the balance sheet do trading securities appear? selector 1 ·        do not appear on the balance sheet ·        in the current assets section ·        in the investments section ·        in the stockholders’ equity section
	3. Where is the gain or loss from the change in value of available-for-sale securities reported in the financial statements? selector 2 ·        as unrealized gains or losses on the income statement ·        in the stockholders’ equity section on the balance sheet ·        in Other Income (Loss) section on the income statement ·        in the investments section on the balance sheet ·        in the current assets section on the balance sheet
	4. Where are held-to-maturity securities Investments in bonds or other debt securities that management intends to hold to their maturity. reported? selector 3 ·on the income statement ·on the balance sheet, in current assets ·on the balance sheet, in long-term assets ·cannot be determined Based on the journal entries for this year, does the company have any held-to-maturity securities? selector 4 ·        unknown ·        yes ·        no
	5. Where are securities held for strategic reasons reported in the financial statements when using the equity method? selector 5 ·on the balance sheet, in stockholders’ equity ·none of these answers is correct ·it depends on the purchase date of the investment ·unrealized gains or losses are reported on the income statement ·on the balance sheet, in the investments section Based on the journal entries for this year, does The Wellington Company have any equity securities The common and preferred stock of a firm. ? selector 6 ·        no ·        yes ·        unknown

Points:

6. Which of the following items does not affect net income? Check all that apply.

both gains and losses of any sort for all investments

realized loss on available-for-sale securities

none of these answers is correct

unrealized gain on available-for-sale securities

only unrealized gains or losses for all investments

unrealized loss on trading securities

realized gain on trading securities

Answer 1

1.	Which item is likely to be a trading security?   Why? Answer: Trading securities are the stocks purchased with the intention of making profit by selling it within a short span of time. Here we can see stock of Mays and Co. was purchased in february and sold by September, i.e., within one year. Hence it is a trading Security.
2.	How are brokerage commission fees treated on stock sales vs. stock purchases? Answer: Brokerage commission fees is treated differently in both Stock Sales and Stock Purchases. In Stock Purchases, the brokerage commission fees is deducted from cash received on sale of stock to calculate net profit or loss. Whereas Brokerage commission fees on stock purchase is added to the overall cost of the stocks to record in the books of accounts.
3.	Based on these journal entries, what is the company’s investment in Sunset Village bonds at the end of the year? Answer: At the end of the year the company's total investment in Sunset Village is: Sunset Village is AFS(Available for Sale) Security, hence it needs to be recorded on FMV(Fair Market Value) BV of sunset village = $37,000 - $22,200 = $14,800 Unrealised Loss on AFS securities = $3,275 Value of Investments in Sunset Village Bonds = $14,800 - $3,275 = $11,525
4.	The journal entry on Aug. 27 most likely shows Answer: It shows the dividend received by the company on the investments in Minions Corp. The reason being: The book Value of Minions Corp is equally reduced, hence it can be assumed that the amount received is dividends on the investment. (When there is a dividend, the book value of the share is reduced proportionately). Another reason to support the answer is that, there is no profit or loss booked, which could have proved the possibility of sale of securities, Hence we can assume that the cash received against Minion Corp is dividends received.