Question

At December 31, year 1, Charter Holding Co. owned the following investments in capital stock of publicly traded companies (classified as available-for-sale securities).

		Cost	Current Market Value
L Brands, Inc. (5,000 shares: cost, $44 per share; market value, $52)	$	220,000		$	260,000
The Gap, Inc. (4,000 shares: cost, $42 per share; market value, $39)		168,000			156,000
	$	388,000		$	416,000

In year 2, Charter engaged in the following two transactions.

Apr.	10		Sold 1,000 shares of its investment in L Brands, Inc., at a price of $58 per share, less a brokerage commission of $100.
Aug.	7		Sold 2,000 shares of its investment in The Gap, Inc., at a price of $37 per share, less a brokerage commission of $150.

At December 31, year 2, the market values of these stocks were: L Brands, Inc., $67 per share; and The Gap, Inc., $37 per share.

Required:

a-1. Calculate the amount of marketable securities reported in the asset section of Charter’s balance sheet at December 31, year 1.

a-2. Calculate the amount of unrealized gain or loss reported in the stockholders' equity section of Charter’s balance sheet at December 31, year 1.

b. Prepare journal entries to record the transactions on April 10 and August 7.

c-1. Prior to making a mark-to-market adjustment at the end of year 2, determine the unadjusted balance in the Marketable Securities control account. (Assume that no unrealized gains or losses have been recognized since last year.)

c-2 Prior to making a mark-to-market adjustment at the end of year 2, determine the Unrealized Holding Gain (or Loss) on Investments account. (Assume that no unrealized gains or losses have been recognized since last year.)

d. Prepare a schedule showing the cost and the market values of securities owned at the end of year 2.

e. Prepare the fair value adjusting entry required at December 31, year 2.

f-1. Calculate the amount of marketable securities in the balance sheet at December 31, year 2.

f-2. Calculate the amount of unrealized holding gain (or loss) in the balance sheet at December 31, year 2.

g. Illustrate the presentation of the net realized gains (or losses) in the year 2 income statement. Assume a multiple-step income statement and show the caption identifying the section in which this amount would appear.

Complete this question by entering your answers in the tabs below.

• Req A1
• Req A2
• Req B
• Req C1
• Req C2
• Req D
• Req E
• Req F1
• Req F2
• Req G

Calculate the amount of marketable securities reported in the asset section of Charter’s balance sheet at December 31, year 1.

Answer 1

Req A1 - The amount of marketable securities reported in the asset section of Charter’s balance sheet at December 31, year 1

a) L Brands, Inc. – 5000 shares @ $ 26.00 = $ 130,000.00

b) The Gap, Inc. – 4000 shares @ $ 15.00 = $ 60,000.00

Req A2 – The amount of unrealized loss reported in the stockholders' equity section of Charter’s balance sheet at December 31, year 1.

a) Unrealized Loss (L Brands, Inc.) – 5000 shares @ $ 18.00 ($44.00 - $26.00) = $ 90,000.00

b) Unrealized Loss (The Gap, Inc.) – 4000 shares @ $ 27.00 ($42.00 - $15.00) = $ 108,000.00

Req B - Journal entries to record the transactions on April 10 and August 7.

a) April 10 –

Dr Bank Account                              $57,900.00

Dr Brokerage                                    $ 100.00

Cr Profit on sale of shares                                                          $14,000.00

Cr Shares (L Brands, Inc.)                                                            $44,000.00

(Being sold 1,000 shares of L Brands, Inc.@ $ 58.00 per share)

b) August 7 –

Dr Bank Account                              $73,850.00

Dr Brokerage                                    $ 150.00

Dr Loss on sale of shares               $ 10,000.00

Cr Shares (The Gap, Inc.)                                              $84,000.00

(Being sold 2,000 shares of The Gap, Inc.@ $ 37.00 per Share)

Req C1 - The unadjusted balance in the Marketable Securities control account at December 31, Year 2.

a) L Brands, Inc. – 4000 shares @ $ 44.00 = $ 176,000.00

b) The Gap, Inc. – 2000 shares @ $ 42.00 = $ 84,000.00

Req C2 - The Unrealized Holding Gain (or Loss) on Investments account prior to make adjustment as at December 31, Year 2.

a) Unrealized Loss (L Brands, Inc.) – 4000 shares @ $ 18.00 ($44.00 - $26.00) = $ 72,000.00

b) Unrealized Loss (The Gap, Inc.) – 2000 shares @ $ 27.00 ($42.00 - $15.00) = $ 54,000.00

Req D – Schedule showing the cost and the market values of securities owned at December 31, Year 2.

Shares	Quantity	Cost per share	Total Cost	Market Value per share	Total Market Value
L Brands, Inc.	4000	$44	$176,000.00	$58.00	$232,000.00
The Gap, Inc.	2000	$42	$84,000.00	$37.00	$74,000.00

Note: Since Shares of L Brands, Inc. sold at $ 58.00 & The Gap, Inc. sold at $ 37.00, we shall take the sale value as current market value as at December 31, Year 2.

Req E – The fair value adjusting entry required at December 31, Year 2.

Req F1 – The amount of marketable securities in the balance sheet at December 31, year 2.

a) L Brands, Inc. – 4000 shares @ $ 58.00 = $ 232,000.00

b) The Gap, Inc. – 2000 shares @ $ 37.00 = $ 74,000.00

Note: Since Shares of L Brands, Inc. sold at $ 58.00 & The Gap, Inc. sold at $ 37.00, we shall take the sale value as current market value as at December 31, Year 2.

Req F1 – The amount of unrealized holding gain (or loss) in the balance sheet at December 31, year 2.

a) Unrealized Gain (L Brands, Inc.) – 4000 shares @ $ 14.00 ($58.00 - $44.00) = $ 56,000.00

b) Unrealized Loss (The Gap, Inc.) – 2000 shares @ $ 15.00 ($42.00 - $37.00) = $ 30,000.00

Note: Since Shares of L Brands, Inc. sold at $ 58.00 & The Gap, Inc. sold at $ 37.00, we shall take the sale value as current market value as at December 31, Year 2.

Req G – The net realized gains (or losses) in the year 2 income statement.

a) Realized Goss (L Brands, Inc.) – 1000 shares @ $ 14.00 ($58.00 - $44.00) = $ 14,000.00

b) Realized Loss (The Gap, Inc.) – 2000 shares @ $ 15.00 ($42.00 - $37.00) = $ 30,000.00