Rantzow-Lear Company buys and sells securities expecting to earn profits on shor

Question

Rantzow-Lear Company buys and sells securities expecting to earn profits on short-term differences in price. The company’s fiscal year ends on December 31. The following selected transactions relating to Rantzow-Lear’s trading account occurred during December 2016 and the first week of 2017.

Recorded any necessary adjusting entry relating to the Grocers' Supply Corporation preferred shares. The market price of the stock was $3 per share.

Prepare the appropriate journal entry for each transaction.

       

Indicate any amounts that Rantzow-Lear Company would report in its 2016 balance sheet and income statement as a result of this investment.

  2016   Dec. 17 Purchased 190,000 Grocers' Supply Corporation preferred shares for $475,000.           28 Received cash dividends of $5,600 from the Grocers' Supply Corporation preferred shares.           31

Recorded any necessary adjusting entry relating to the Grocers' Supply Corporation preferred shares. The market price of the stock was $3 per share.

   2017   Jan.   5 Sold the Grocers' Supply Corporation preferred shares for $541,500.

Explanation / Answer

Answer 1:

Answer 2:

Following amount will be reported in balance sheet

Current Investments/Trading securities

securities at cost = 475,000

Add: Fair value appreciation = 95,000

Total = 570,000

Following amount will be reported in income statement

Dividend income from Investment = $ 5,600

Unrealized gain from investment = $ 95,000

Date Particular Debit Credit Dec 17,2016 Investment in Grocers' supply corporation A/c $ 475,000 Cash A/c $ 475,000 (purchased 190,000 preferred shares) Dec 28,2016 Cash/Bank A/c $ 5,600 Investment/Dividend Revenue A/c $ 5,600 (cash dividend received) Dec 31,2016 Fair Value appreciation of investment A/c $ 95,000 To Unrealized gain from investment A/c $ 95,000 (increase in market value of shares over cost of shares recorded in the books) = (190,000 x $ 3 = 570,000 - 475,000) = 95,000 5 Jan, 2017 Cash A/c 541,500 To Investment is Grocers' supply corporation A/c 475,000 To profit from investment A/c 66,500 (investment in preferred stock of Grocers' supply corporation sold) 1 Jan,2017 Unrealized gain from investment A/c $95,000 To Fair value appreciation investment A/c $95,000 (journal entry adjustment reversal)

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