Group B ES-27B. (Learning Objective 1: Apply GAAP for short-term investments) No

Question

Group B ES-27B. (Learning Objective 1: Apply GAAP for short-term investments) Northern Corporation, the investment banking company, often has extra cash to invest. Suppose Northern buys 1,000 shares of Twister, Inc., stock at $46 per share. Assume Northern expects to hold the Twister stock for one month and then sell it. The purchase occurs on December 15,2016.At December 31, the market price of a share of Twister stock is $69 per share Requirements LO 1 1. What type of investment is this to Northern? Give the reason for your answer 2. Record Northern's purchase of the Twister stock on December 15 and the adjustment to market value on December 31. any gain or loss on its income statement for the year ended December 31, 2016. intended to treat it as a short-term investment. How do your answers for parts 1-3 change? 3. Show how Northern would report this investment on its balance sheet at December 31 and . Suppose Northern did not intend to treat the Twister stock as a trading security, but still Follow Exhibit 5-2

Explanation / Answer

1. Company is doing investment in securities for the purpose of short term gain. It's short term investment of the company because company has intention to sell in 1 month.

2. 15/12 Investment in shares a/c dr 46000

to Bank 46000

31/12 Investment in shares a/c 23000 (69-46)*1000

to Unrealised gain on investment 23000

3. Balance Sheet

Investment

Short Term Investment 69000

Income Statement

Other Income

Unrealised gain on Investment 23000

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