Question

9. Perez Company began operations in 2017. Since then, it has reporte its equity investments in on the income statement: f security h, it has reported the following gains and losses for Gains (losses) from sale of securities Unrealized holding losses on valuation of securities Unrealized holding gain on valuation of securities 2017 $15,000 (30,000) 2018 $(20,000) 2019 $ 14,000 (15,000) "valuation of securities unt using -aight-line to bond revende ment and st period reased by 10,000 At January 1, 2020, Perez owned the following securities: est reyes Cost BKD Common (15,000 shares @ $30) $450,000 LRF Preferred (2,000 shares @ $105) 210,000 During 2020, the following events occurred: 1. Sold 5,000 shares of BKD for $170,000. 2. Acquired 1,000 shares of Horton Common for $40 per share. Brokerage commissions totaled $1,000. At 12/31/20, the fair values for Perez's investments were: BKD Common, $28 per share LRF Preferred, $110 per share Horton Common, $45 per share Instructions (a) Prepare a schedule which shows the balance in the Fair Value Adjustment account at December 31, 2019 (after the adjusting entry for 2019 is made). (b) Prepare a schedule which shows the aggregate cost and fair values for Perez's securities portfolio at 12/31/20. (c) Prepare the necessary adjusting entry based upon your analysis in (b) above.

Answer 1

Trading securities are recorded at fair value and any adjustment at year end results in unrealized gain or loss. When securities are sold, income or loss is recognized. If brokerage or commission is paid, it shall be included in initial purchase price of trading stock.

a.

Balance 31.12.17 as result of adjusting entry	(30,000)
Less: unrealized gain for 2018	10,000
Add: Unrealized loss for 2019	(15000)
Balance as on 31.12.2019	35,000

b.

	Cost	Fair value
BKD common shares,10,000 shares	300,000	280,000
LRF preferred shares,2000 shares	210,000	220,000
Horton common, 1000 shares	41,000	45,000
Total	551,000	545,000

Fair value computed by multiplying no. of shares outstanding and fair value given in this case.

c.

Adjusting entry for 31.12.2020 is given below:

Date	Particulars	Debit ($)	Credit ($)
	Fair value adjustment (trading)	29,000
	Unrealized holding gain or loss-income		29,000
	(To record the adjusting entry)

Balance as on 31.12.2019	35,000
Balance required at 31.12.2020 (551,000 – 545,000)	(6,000)
Recovery	29,000

               

kindly upvote