Aranda Corporation made the following cash purchases of securities during 2017, which is the first year in which Arantxa invested in securities. 1. On January 15, purchased 10,000 shares of Sanchez Company's common stock at $33.50 per share plus commission $1,980. 2. On April 1, purchased 5,000 shares of Vicario Co.'s common stock at $52.00 per share plus commission $3,370. 3. On September 10, purchased 7,000 shares of WTA Co.'s preferred stock at $26.50 per share plus commission $4,910. On May 20, 2017, Aranda sold 4,000 shares of Sanchez Company's common stock at a market price of $35 per share less brokerage commissions, taxes, and fees of $3,850. The year-end fair values per share were Sanchez $30, Vicario $55, and WTA $28. In addition, the chief accountant of Aranda told you that the corporation plans to hold these securities for the long-term but may sell them in order to earn profits from appreciation in prices. The equity method of accounting is not appropriate for these stock purchases.

Instructions

(a) Prepare the journal entries to record the above three security purchases.
(b) Prepare the journal entry for the security sale on May 20.
(c) Compute the unrealized gains or losses and prepare the adjusting entries for Aranda on December 31, 2017. Show all calculations.

a.

January 15, 2017

Equity Investments 336,980

Cash 336,980

April 1, 2017

Equity Investments 263,370

Cash 263,370

September 10, 2017

Equity Investments 190,410

Cash 190,410

b.

May 20, 2017

Gross selling price of 4,000 shares at $35 = $140,000

Commissions, taxes, and fees = $3,850

Net proceeds = $140,000 - $3,850 = $136,150

Cost of 4,000 shares ($336,980 X 0.4) = (134,792)

Gain on sale of stock = $ 1,358

c.

December 31, 2017

Unrealized Holding Gain or Loss—Income $4,968

Fair Value Adjustment --- $4,968

Explanation:

The three investments are

1. Sanchez

2. Vicario

3. WTA

(a)

10,000 shares were purchased from Sanchez Company Common Stock at $33.50 per shares

5,000 shares were purchased from Vicario Co.'s at $52.50 per shares

7,000 shares were purchased from WTA Co.'s at $26.50 per shares

So, the total purchase price of these investments is:

Sanchez: (10,000 X $33.50) + $1,980 = $336,980

Vicario: (5,000 X $52.00) + $3,370 = $263,370

WTA: (7,000 X $26.50) + $4,910 = $190,410

The purchase entries:

January 15, 2017

Equity Investments 336,980

Cash 336,980

April 1, 2017

Equity Investments 263,370

Cash 263,370

September 10, 2017

Equity Investments 190,410

Cash 190,410

(b)

On May 20, 2017, Aranda sold 4,000 shares of Sanchez Company's common stock at a market price of $35 per share less brokerage commissions, taxes, and fees of $3,850

Gross selling price of 4,000 shares at $35 = $140,000

Commissions, taxes, and fees = $3,850

Net proceeds = $140,000 - $3,850 = $136,150

Cost of 4,000 shares ($336,980 X 0.4) = (134,792)

Gain on sale of stock = $ 1,358

(c)

Compute the unrealized gains or losses and prepare the adjusting entries for Aranda on December 31, 2017

Sanchez Co.

Cost = $202,188

Fair Value= $180,000

Unrealized Gain (loss) = $202,188 - $180,000

Unrealised Gain (loss) = $22,188

Vicario Co.

Cost = $263,370

Fair Value = $275,000

Unrealized Gain (loss) = $263,370 - $275,000

Unrealized Gain (loss) = $11,630

WTA Co.

Cost = $190,410

Fair Value = $196,000

Unrealized Gain (loss) = $190,410 - $196,000

Unrealized Gain (loss) = $5,590

Total portfolio value

Cost = $655,968

Fair Value = $651,000

Unrealized Gain (loss) = $4,968

Previous fair value adjustment balance = 0

Fair value adjustment—Cr. = $4,968

December 31, 2017

Unrealized Holding Gain or Loss—Income $4,968

Fair Value Adjustment --- $4,968

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