Question

Question #3 (25 marks) During the year ended December 31, 2019, and in the following months of January and February 2020, Company M had the following transactions pertaining to it held for trading investments: Apr. 15 Purchased 2,000 Starr Corporation $5, preferred shares for $206,000 cash July 11 Received quarterly cash dividend. 21 Sold 500 Starr shares for $57,500 cash. Oct. 15 Received quarterly cash dividend. Nov. 22 Starr declared the quarterly dividend on November 22, to preferred shareholders of record on December 15, payable on January 1. Dec. 31 Starr's shares were trading at $116 per share. Due to an urgent need for cash, 700 Starr Corporation shares were sold despite a drop in the share price to $92 per share. Feb. 13 Marshall sold an additional 500 Starr shares after the market recovered to $118 per share. Jan. 29 Instructions a) Record the above transactions, using the fair value through profit or loss model. Prepare any required adjusting entries at December 31.

Answer 1

(a)              Transactions

Apr. 15 Held for Trading Investments...............................................      206,000

                        Cash.................................................................................                              206,000

July       11 Cash (2,000 × $5 ÷ 4)............................................................          2,500

                        Dividend Revenue...........................................................                                  2,500

           021 Cash.......................................................................................        57,500

                         Realized Gain on Held for Trading Investments............ 6,000                       

                        Held for Trading Investments.........................................                                51,500

                        [($206,000 ÷ 2,000) × 500]

Oct.      15 Cash [(2,000 – 500) × $5 ÷ 4]................................................          1,875

                        Dividend Revenue...........................................................                                  1,875

(b)              Adjusting entries

Dec.    31   Dividends Receivable............................................................          1,875                                   

                        Dividend Revenue...........................................................                                  1,875

           31   Held for Trading Investments...............................................        19,500

                        Unrealized Gain on Held for Trading Investments.........                                19,500

                        (1,500 × $116) – ($206,000 – $51,500)

Jan. 29 Cash (700 x $92)....................................................................        64,400

                  Realized Loss on Held for Trading Investments...................        16,800

                        Held for Trading Investments.........................................                                81,200

                        (Carrying amount = $116 × 700)

Feb.    13 Cash (500 × $118).................................................................        59,000

                        Realized Gain on Held for Trading Investments.............                                  1,000

                        Held for Trading Investments.........................................                               58,000

                        (Carrying amount = $116 × 500)