Hampton Developments Ltd. (Ham
Hampton Developments Ltd. (Hampton) had the followingtransactions pertaining to its investments which are accounted forunder fair value through profit & loss. This is the first yearHampton has ever purchased investments.
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2019 |
Transaction Details |
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Jan. 1 |
Purchased 1,000 shares of Chapman Foods Ltd. (Chapman)for$50,000 cash, plus brokerage fees of $550. Purchased 5,000 shares of Sinclair Manufacturing Ltd (Sinclair)for $75,000. |
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June 1 |
Received cash dividends of $3 per share on the Chapmanshares. |
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Sept. 15 |
Sold 500 Chapman shares for $25,900 less brokerage fees of$100. |
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Dec. 31 |
The fair value of the shares of Chapman was $35 per share. The fair value of the shares of Sinclair was $12 per share. |
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2020 |
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Feb 14 |
Sold 1,250 shares of Sinclair for net proceeds of $35,000. Theselling commission rate on the shares was 1.75%. |
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Dec. 31 |
The fair value of the shares of Chapman was $27 per share. The fair value of the shares of Sinclair was $23 per share. |
Required:Prepare all the journal entries required for the above notedtransactions for 2019 & 2020
Type or paste question here
Answer:
Answer to Question :
Year 2019:
| Date | Account Title | Debit($) | Credit($) |
| Jan 1 | Investment A/c- Chapman | 50,000 | |
| To, Cash | 50,000 | ||
| (Being 1000 shares of Chapman Foods Ltdpurcahsed). | |||
| Jan 1 | Brokerage A/c | 500 | |
| To, Cash | 500 | ||
| (Being Brokerage paid for sharespurchased) | |||
| Jan 1 | Investment A/c- Sinclair | 75,000 | |
| To, Bank | 75,000 | ||
| (Being 5,000 shares of SinclairManufacturing Ltd. purcahsed) | |||
| Jun1 | Cash A/c | 3,000 | |
| To, Dividend | 3,000 | ||
| (Received cash dividends of $3 per shareon the Chapmans 1000 shares. | |||
| Sept 15 | Bank | 25,900 | |
| To, Investment A/c- Chapman | 25,900 | ||
| (Sold 500 shares of Chapman ) | |||
| Sept 15 | Brokerage A/c | 100 | |
| To, Cash | 100 | ||
| (Being Brokerage paid for sharessold) | |||
| Dec 31 | SPL A/c | 600 | |
| To, Brokerage | 600 | ||
| (Being brokerage paid transferred toStatemment of Profit & Loss) | |||
| Dec 31 | Dividend A/c | 3,000 | |
| To,SPL | 3,000 | ||
| (Being dividend received credited toStatemment of Profit & Loss) | |||
| Dec 31 | SPL A/c | 22,500 | |
| To,Investment A/c- Chapman | 7500 | ||
| To,Investment A/c- Sinclair | 15,000 | ||
| (Being Fair Value adjustment made atClosing date) | |||
Working Note:
Chapman Ltd:
No. of shares available = 1000 shares – 500 shares = 500shares
Purchase Price per share = $50000/1000 = $50 per share
Fair Value as on 31.12.2019 = $35 per share
Loss of ($50-$35) per share transferred to SPL.
Total Loss on Fair Value Adjustment of Chapman’s Shares = 500shares*$15 = $7,500
Sinclair:
No. of shares available = 5000 shares
Purchase Price per share = $75000/5000 = $15 per share
Fair Value as on 31.12.2019 = $12 per share
Loss of ($15-$12) per share transferred to SPL.
Total Loss on Fair Value Adjustment of Sinclair’s Shares = 5000shares*$3 = $15,000
………………………………………………………………………………………………………………………………………………………….
Year 2020:
| Date | Account Title | Debit($) | Credit($) |
| Feb 14 | Brokerage A/c | 623.41 | |
| To, Cash | 623.41 | ||
| (Being Brokerage paid for sharespurchased) | |||
| Feb 14 | Bank | 35,000 | |
| To, Investment – Sinclair | 35,000 | ||
| (Being 1250 shares sold of Sinclair) | |||
| Dec 31 | SPL A/c | 4000 | |
| To,Investment A/c- Chapman | 4000 | ||
| (Being Fair Value adjustment made atClosing date) | |||
| Dec 31 | Investment A/c- Sinclair | 41250 | |
| To, Spl | 41250 | ||
Working Note:
No of shares sold of Sinclair = 1250 shares
Net Proceeds = $35,000
Rate of Selling Commission = 1.75%
Gross Proceeds from Sale = $35,000/98.25% = $35623.41
Amount of Commission = $35623.41 – $35,000 = $623.41
Chapman:
No. of shares of Chapman available = 500 shares
Change In Fair Value = $27 -$35 = $8
Loss of $8 per share transferred to SPL.
Total Loss on Fair Value Adjustment of Chapman’s Shares = 500shares*$8 = $4000
Sinclair:
No. of shares available = 5000 shares- 1250 shares = 3750shares
Change In Fair Value = $23-$12= $11
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