Northern Corporation, the investment banking company, often has extra cash to in

Question

Northern Corporation, the investment banking company, often has extra cash to invest. Suppose Northern buys 800 shares of Music, Inc., stock at $46 per share. Assume Northern expects to hold the Music 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 Music stock is $51 per share Requirements 1. What type of investment is this to Northern? Give the reason for your answer 2. Record Northern's purchase of the Music stock on December 15 and the adjustment to market value on December 31 3. Show how Northern 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, 2016 Suppose Northern did not intend to treat the Music stock as a trading security, but still intended to treat it as a short-term investment. How do your answers for parts 1-3 change? 4. Requirement 1. What type of investment is this to Northern? Give the reason for your answer Northern's investment is Requirement 2. Record Northern's purchase of the Music stock on December 15 and the adjustment to market value on December 31. (Record debits first, Vbecause the company intends to sell the stock then credits. Exclude explanations from any journal entries. Abbreviation used: AFSs- available-for-sale security.) Lets begin by recording the stock purchase Journal Entry Date Accounts Debit Credit ec 15 Now record the entry for the adjustment to market value on December 31, 2016 Journal Entry Date Accounts Debit Credit ec 31

Explanation / Answer

Ans 1 A Trading security because the company has intention to sell it within a short time period. An investment is a trading security when company intends to hold a stock for a short span of time and than sell it ans 2 Accounts Title Dr Cr 15-Dec Investment in Trading Securities, at cost $36,800 Cash (800*$46) $36,800 31-Dec Investment in Trading Securities $4,000 Unrealized gain on trading securities $4,000 800*(51-46) Balance Sheet Investment in Trading Securities $40,800 (800*51) Income statement Unrealized gain on trading securities $4,000 ans 4 Avaialble for sale security ans 5 Accounts Title Dr Cr 15-Dec Investment in AFSS $36,800 Cash (800*$46) $36,800 31-Dec Investment in AFSS $4,000 Unrealized gain on investment AFSS $4,000 800*(51-46) Balance Sheet Investment in AFSS $40,800 (800*51) Income statement No effect Statement of comprehensive Income Unrealized gain on investment AFSS $4,000 If any doubt please comment. If satisfied you can rate

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