Question

On November 1, 2018, United Airlines purchases 10,000 shares of Exxon Mobil for $120 per share plus a total of

$500 commission. These shares are classified as trading securities. On December 31, 2018, Exxon Mobil is trading

for $110 per share. On January 5, Exxon pays shareholders $3 per share in dividends. On February 5, 2019 United

Airlines sells the Exxon shares for $115 per share. United Airlines has a tax rate of 20%.

Requirements:

a.

Show all the needed journal entries for the Exxon stock from purchase to sale.

b.

Describe how the Exxon Mobil stock and the results will be disclosed on the income statement, balance

sheet and statement of comprehensive income for 2018 and 2019

Answer 1

Date Particulars 01-11-2018 Trading Securities To Cash Debit $ 12,00,500.00 Credit Reference Working Note 1 $ 12,00,500.00 (Being trading securities purchased. Commission should be included in the cost of trading securities) $ 1,00,500.00 31-12-2018 Unrealized loss on trading securities To Trading Securities Working Note 2 1,00,500.00 $ (Being Unrealized loss on trading securities recognized to record trading securities at fairvalue) $ 30,000.00 05-01-2019 Cash To Dividend Income (Being dividend income recognized) Working Note 3 30,000.00 $ $ 11,50,000.00 05-02-2019 Cash To Trading Securities To Realized gain on trading securities (Being sale of trading securities recorded) $ $ Working Note 4 50,000.00 11,00,000.00

$ 10,000.00 05-02-2019 Tax on Capital gain To Capital Gain tax payable (Being tax payable on capital gain recorded) Working Note 5 10,000.00

Working Note 1 Cost of Trading Securities = (10,0000 shares x $120) + $500 = $1,200,500 Working Note 2 Shares classified as trading securities should be recorded at fair value on the balance sheet date. Since the investment has decreased in value, it must be written down to its fair value and the unrealized loss charged. Unrealized loss on trading securities = $1,200,500 - (10,0000 shares x $110) = $1,00,500 Working Note 3 Dividend on trading securities are treated like normal income and credited to income statement. Dividend income = 10,0000 shares x $3 = $30,000 Working Note 4 On sale of trading securities, the difference between consideration received and carrying value of securities is recorded and realized as profit/ loss. In this case a profit is realized as carrying value of securities is higher than consideration received. Realized profit on sale of trading securities = (10,0000 shares x $115) – $1,100,000 =$50,000 Working Mote 5 The question is not clear on whether the tax given is the capital gain tax. However it is assumed to capital gain tax. Capital Gain tax = Realized profit x 20% = $50,000 x 20% = $10,000

b) Disclosure on Balance sheet (2018): As stated in working notes 2, trading securities are disclosed at its fair value on the end of the accounting period. These securities are shown under "Current Assets" . Further the unrealized loss on trading securities are shown as a separate line item under shareholders equity. So record Trading securities under current asset at $11,00,000 and show unrealized loss under shareholders' equity at $1,00,500. Disclosure on Balance sheet (2019): No disclosures required as trading security and unrealized loss cease to exist. However, the capital gain tax liability of $10,000 will be shown under "current liabilities". Disclosure on Income statement (2018): Only dividend income is recorded on income statement during 2018. Since the loss is unrealized it does not affect the income statement. So record dividend income of $30,000 Disclosure on Income statement (2019): The realized profit on sale of trading securities is recorded in the income statement as the same security is sold and cease to exist. Also record the capital tax payable as an expense. So record realized profit of $50,000 and a capital gain tax expense of $10,000. Statement of comprehensive income (2018 and 2019) = Since the investment are classified as trading securities there will not be any entry on comprehensive statement. Changes in value of securities available for sale are normally recorded in comprehensive statement.