Question

(Equity Investments) Kenseth Company has the following securities in its portfolio on December 31, 2017.

None of these investments are accounted for under the equity method.

Investments Cost Fair Value

1,500 shares of Gordon, Inc., common \( 73,500 \) 69,000

5,000 shares of Wallace Corp., common 180,000 175,000

400 shares

of Martin, Inc., preferred 60,000 61,600

\(313,500 \)305,600

All of the securities were purchased in 2017.

In 2018, Kenseth completed the following securities transactions.

March 1 Sold the 1,500 shares of Gordon, Inc., common, @ \(45 less fees of \)1,200

April 1 Bought 700 shares of Earnhart Corp., common, @ \(75 plus fees of \)1,300

Kenseth’s portfolio of equity securities appeared as follows on December 31, 2018.

Investments Cost Fair Value

5,000 shares of Wallace Corp., common \(180,000 \)175,000

700 shares of Earnhart Corp., common 53,800 50,400

400 shares of Martin, Inc., preferred 60,000 58,000

\(293,800 \)283,400

Instructions

Prepare the general journal entries for Kenseth Company for:

(a) The 2017 adjusting entry.

(b) The sale of the Gordon stock.

(c) The purchase of the Earnhart stock.

(d) The 2018 adjusting entry for the portfolio.

Short answer

Answer:

(a) Unrealized holding loss debited and fair value adjustment creditedby $7,900

(b) Cash debited by66,300, loss on sale of stock debited by $7,200 and equity investment credited by $73,500.

(c) Equity investment debited and cash credited by $53,800

(d) Unrealized income on the stocks is $10,400

Step-by-step solution

Adjustment entry for the year ending 2017

Date	Particulars	Debit	Credit
December 31, 2017	Unrealized Holding Loss	$7,900
	Fair value adjustment		$7,900
	(Entry for the unrealized holding loss)

$\begin{array}{c}\mathrm{Unrealized}\mathrm{Holding}\mathrm{Loss}=\mathrm{Cost}-\mathrm{Fair}\mathrm{Value}\\ =\$313,500-\$305,600\\ =\$7,900\end{array}$

Entry for the sale of stock

Date	Particulars	Debit	Credit
March 1, 2018	Cash	$66,300
	Loss on sale of shares	$7,200
	Equity investment		$73,500
	(Entry for the sale of stock)

$\begin{array}{c}\mathbf{Cash}\mathbf{}\mathbf{from}\mathbf{}\mathbf{Gordon}\mathbf{}\mathbf{Stocks}\mathbf{=}(\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Shares}\mathbf{\times }\mathbf{Price}\mathbf{}\mathbf{Per}\mathbf{}\mathbf{Share})\mathbf{-}\mathbf{Fees}\\ \mathbf{=}(\mathbf{1}\mathbf{,}\mathbf{500}\mathbf{\times }\mathbf{\$}\mathbf{45})\mathbf{-}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{200}\\ =\$66,300\end{array}$

Entry for the purchase of stock

Date	Particulars	Debit	Credit
April 1, 2018	Equity Investment	$53,800
	Cash		$53,800
	(Entry for the purchase of common stock)

$\begin{array}{c}\mathbf{Cash}\mathbf{}\mathbf{Paid}\mathbf{}\mathbf{for}\mathbf{}\mathbf{Earn}\mathbf{}\mathbf{hart}\mathbf{}\mathbf{Stocks}\mathbf{=}(\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Shares}\mathbf{\times }\mathbf{Price}\mathbf{}\mathbf{Per}\mathbf{}\mathbf{Share})\mathbf{+}\mathbf{Fees}\\ \mathbf{=}(\mathbf{700}\mathbf{\times }\mathbf{\$}\mathbf{75})\mathbf{+}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{300}\\ =\$53,800\end{array}$

Adjustment entry for the year ending 2018

Date	Particulars	Debit	Credit
December 31,2018	Unrealized holding L/P- Income	$2,500
	Fair value Adjustment		$2,500
	(Being adjustment of the fair value)

Securities	Cost (A)	Fair value (B)	Unrealized gain or (loss) (A-B)
Wallace	$180,000	$175,000	$(5,000)
Earnhart	$53,800	$50,400	$(3,400)
Martin	$60,000	$58,000	$(2,400)
Total portfolio	$293,800	$283,400	$(10,400)
Previous fair value adjustments			$(7,900)
Fair value adjustment			$(2,500)