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3 June, 23:39

Flounder Co. had purchased 240 shares of Washington Co. for $42 each this year (Oregon Co. does not have significant influence). Flounder Co. sold 120 shares of Washington Co. stock for $47 each. At year-end, the price per share of the Washington Co. stock had dropped to $37. Prepare the journal entries for these transactions and any year-end adjustments

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  1. 3 June, 23:58
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    Purchase of shares:

    Debit: Equity investment $10,080

    Credit: Cash $10,080

    Sale of 120 shares:

    Debit: Cash $5,640

    Credit: Equity investment $5,040

    Credit: Gain on sale of 120 shares $600

    Journal entry to make fair value adjustment:

    Debit: Unrealised loss on holding equity investment $600

    Credit: Securities fair value adjustment $600

    Explanation:

    Purchase of share:

    Number of shares purchased: 240 shares

    Price per share = $42 per share

    Total value of shares purchased = Number of shares purchased * Price per share

    Total value of shares purchased = 240 * $42 per share

    Total value of shares purchased = $10,080

    The journal entry to record the purchase of share would be as follows:

    Equity investment is a current asset, this is an investment - A debit item Cash - another current asset, decreased - A credit would be made. Journal entry to record the purchase of shares:

    Debit: Equity investment $10,080

    Credit: Cash $10,080

    Sale of shares:

    Number of shares sold = 120 shares

    Selling price per share = $47 per share

    Value of shares sold = 120 shares * $47 per share

    Value of shares sold = $5,640

    Cost of equity investment for 120 shares = 120 shares * $42 per share

    Cost of equity investment for 120 shares = $5,040

    There is a gain on sale of shares = $5,640 - $5,040

    Gain on sale of shares = $600

    Journal entry to record the sale of the shares

    Debit: Cash $5,640

    Credit: Equity investment $5,040

    Credit: Gain on sale of 120 shares $600

    Recording unrealised loss on the equity investment at the year-end:

    The price per share has dropped to $37, therefore, we need to adjust the fair value of the investment.

    Journal entry to adjust the fair value of equity investment:

    Remaining shares: 240 shares - 120 shares (sold) = 120 shares

    Cost of equity investment for 120 shares = 120 shares * $42 per share

    Cost of equity investment for 120 shares = $5,040

    Cost of remaining shares at the year-end = 120 shares * $37 per share

    Cost of remaining shares at the year-end = $4,440

    There is an unrealised loss on the value of shares = $5,040 - $4,440 = $600.

    We need to make a fair value adjustment to the investment:

    Journal entry to make fair value adjustment:

    Debit: Unrealised loss on holding equity investment $600

    Credit: Securities fair value adjustment $600
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Home » Business » Flounder Co. had purchased 240 shares of Washington Co. for $42 each this year (Oregon Co. does not have significant influence). Flounder Co. sold 120 shares of Washington Co. stock for $47 each. At year-end, the price per share of the Washington Co.
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