For this problom, is the journal entry (2) in bold/ italic correct, please advic

Question

For this problom, is the journal entry (2) in bold/ italic correct, please advice with explanation?

Property dividend is an investment in equity securities “available for sale”:

The Remley company declares a property dividend on 3/15/15, Payable in Welch company stock. The Welch stock had been purchased early in 2014 for $24,000 and was reported as an asset at a fair value of $29,000 on 12/31/14 balance sheet.

The market value of Welch stock is $31,000 on 3/15/15. The following entries are made on 3/15/15 (the declaration date):

Adj. prior to the recog. Of dividends payable:

  1)   Fair Value Adjustment                        2,000

            Unrealized holding gain-B/S                  2,000

2) Unrealized holding gain                 7,000

          Gain on Disposal of Investment       7,000

J.E. on the declaration date:

Retained Earnings                 31,000

Property Dividends Payable              31,000

J.E. on the payment date:

Property Dividends Payable           31,000

Equity Investments                             24,000

     Fair Value Adjustment                            7,000

Explanation / Answer

SOLUTION:

Particulars Debit Credit Fair Value Adjustment                        2,000 Unrealized holding gain-B/S 2,000 (MV-FV = 31,000 - 29,000) Unrealized holding gain 7000 Gain on Disposal of Investment 7000 (MV-Purchase price =31,000 - 24,000 = 7,000) J.E. on the declaration date: Retained Earnings 31,000 Property Dividends Payable 31,000 J.E. on the payment date Property Dividends Payable 31,000 Equity Investments 24,000 Fair Value Adjustment 7,000

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