Apply GAAP for short-term investments. E5-21A (Learning Objective 1: Apply GAAP

Question

Apply GAAP for short-term investments.

E5-21A   (Learning Objective 1: Apply GAAP for short-term investments) Eastern Corporation, the investment banking company, often has extra cash to invest. Suppose Eastern buys 1,000 shares of Dream, Inc., stock at $57 per share. Assume Eastern expects to hold the Dream stock for one month and then sell it. The purchase occurs on December 15, 2012. At December 31, the market price of a share of Dream stock is $58 per share.

Requirements

1.   What type of investment is this to Eastern? Give the reason for your answer.

2.   Record Eastern’s purchase of the Dream stock on December 15 and the adjustment to market value on December 31.

3.   Show how Eastern would report this investment on its balance sheet at December 31 and any gain or loss on its income statement for the year ended December 31, 2012.

Apply GAAP for short-term investments.

E5-21A   (Learning Objective 1: Apply GAAP for short-term investments) Eastern Corporation, the investment banking company, often has extra cash to invest. Suppose Eastern buys 1,000 shares of Dream, Inc., stock at $57 per share. Assume Eastern expects to hold the Dream stock for one month and then sell it. The purchase occurs on December 15, 2012. At December 31, the market price of a share of Dream stock is $58 per share.

Requirements

1.   What type of investment is this to Eastern? Give the reason for your answer.

2.   Record Eastern’s purchase of the Dream stock on December 15 and the adjustment to market value on December 31.

3.   Show how Eastern would report this investment on its balance sheet at December 31 and any gain or loss on its income statement for the year ended December 31, 2012.

Explanation / Answer

1.   What type of investment is this to Eastern? Give the reason for your answer.

Solution:

This is a short term investment (Trading Securities) for Eastern as he plan to sell the investment after a period of one month from the date of its purchase.

2.   Record Eastern’s purchase of the Dream stock on December 15 and the adjustment to market value on December 31.

15th Dec

Investment A/c...............Dr. 57000

To Cash A/c. 57000

31st Dec

Investment A/c. ............Dr. 1000

To Unrealized Gain/Loss 10000

3.   Show how Eastern would report this investment on its balance sheet at December 31 and any gain or loss on its income statement for the year ended December 31, 2012.

Investment A/c. at the market rate will be shown in the balance sheet under the head current asset

Unrealized Gain/ Loss will be shown in the Income Statement as an expense

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.