Prepare a journal entry dated December 31, 2017, to record the fair value adjust

Question

Prepare a journal entry dated December 31, 2017, to record the fair value adjustment of the long-term investments in available-for-sale securities. Carperk had no long-term investments prior to year 2017. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Information regarding Carperk Company's individual investments in securities during its calendar-year 2017, along with the December 31, 2017, fair values, follows.

Investment in Brava Company bonds: $456,150 cost, $495,835 fair value. Carperk intends to hold these bonds until they mature in 2022.

Investment in Baybridge common stock: 29,500 shares; $362,639 cost; $394,189 fair value. Carperk owns 32% of Baybridge's voting stock and has a significant influence over Baybridge.

Investment in Buffa common stock: 12,000 shares; $187,022 cost; $201,610 fair value. This investment amounts to 3% of Buffa’s outstanding shares, and Carperk’s goal with this investment is to earn dividends over the next few years.

Investment in Newton common stock: 3,500 shares; $104,002 cost; $102,234 fair value. Carperk’s goal with this investment is to reap an increase in fair value of the stock over the next three to five years. Newton has 30,000 common shares outstanding.

Investment in Farmers common stock: 16,300 shares; $114,038 cost; $121,108 fair value. This stock is marketable and is held as an investment of cash available for operations.

  
Required:

1. Identify whether each investment should be classified as a short-term or long-term investment. For each long-term investment, indicate in which of the long-term investment classifications it should be placed.
2. Prepare a journal entry dated December 31, 2017, to record the fair value adjustment of the long-term investments in available-for-sale securities. Carperk had no long-term investments prior to year 2017.

Journal entry worksheet Record the fair value adjustment of the long-term investments in available-for- sale securities for Dec 31,2017. Carperk had no long-term investments prior to year 2017. Note: Enter debits before credits. Date General Journal Debit Credit Dec 31 Record entry Clear entry View general journal

Explanation / Answer

REQUIREMENT 1 :

Classification of investments -

Note :

- Long term investments are the one intended to hold for more than a year.

- Short term investments are the one which can be converted into cash within a year.

- Held-to-maturity debt securities are debt instruments that firms plan on holding until maturity.

- Available-for-sale equity security is the equity security purchased with the intent of selling before it reaches maturity

REQUIREMENT 2

Explanation -

The available-for-sale equity securities are the investments in Buffa Common Stock and Newton Common Stock as seen in the requirement 1.

Therefore, we will calculate the difference of cost and fair value figures with regard to these two investments.

So, the unrealized gain is $12,820. The journal entry is as follows:

Journal Entry

Investments Type of investments Classification of long term investments a. Investment in Brava Company bonds Long term investments Held-to-maturity debt securities b. Investment in Baybridge Common Stock Long term investments Equity securities c. Investment in Buffa Common Stock Long term investments Available-for-sale equity securities d. Investment in Newton Common Stock Long term investments Available-for-sale equity securities e. Investment in Farmers Common Stock Short term investments -

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