Accounting for Marketable Securities
At December 31, 2014, Westport Manufacturing Co. owned the following investments in the capital stock of publicly owned companies (all classified as available-for-sale securities):
| Cost | Current Market Value |
Lamb Computer, Inc. (1,000 shares: cost, $30 per share; market value, $50) | $30,000 | $50,000 |
Dry Foods (5,000 shares: cost, $9 per share; market value, $8) | 45,000 | 40,000 |
Totals | $75,000 | $90,000 |
In 2015, Westport engaged in the following two transactions:
Apr. 6 | Sold 100 shares of its investment in Lamb Computer at a price of $55 per share, less a brokerage commission of $20. |
Apr. 20 | Sold 2,500 shares of its Dry Foods stock at a price of $7 per share, less a brokerage commission of $20. |
At December 31, 2015, the market values of these stocks were: Lamb Computer, $40 per share; Dry Foods, $7.
Instructions
a. Illustrate the presentation of marketable securities and the unrealized holding gain or loss in Westport’s balance sheet at December 31, 2014. Include a caption indicating the section of the balance sheet in which each of these accounts appears.
b. Prepare journal entries to record the transactions on April 6 and April 20.
c. Prior to making a fair value adjustment at the end of 2015, determine the unadjusted balance in the Marketable Securities controlling account and 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 market values of securities owned at the end of 2015. (Use the same format as the schedule illustrated above.)
e. Prepare the fair value adjusting entry required at December 31, 2015.
f. Illustrate the presentation of the marketable securities and unrealized holding gain (or loss) in the balance sheet at December 31, 2015. (Follow the same format as in part a.)
g. Illustrate the presentation of the net realized gains (or losses) in the 2015 income statement. Assume a multiple-step income statement and show the caption identifying the section in which this amount would appear.
h. Explain how both the realized and the unrealized gains and losses will affect the company’s 2015 income tax return.
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