ACCT 201 Principles of Financial Accounting
Practice Exam - Chapter 7
Reporting & Analyzing Receivables and Investments
Dr. Fred Barbee

Solution to Problem #1
Prepare journal entries to record the following investment-related transactions of a company for its first year of operations:

a. On May 4, the company purchased 600 shares of Orbital Company Stock at $120 per share plus a $750 brokerage fee as a short-term investment in an available-for-sale security.
b. On July 1, received a $2.50 per share cash dividend on the Orbital Company stock purchased in transaction (a).
c. On September 15, sold 300 shares of Orbital Company stock purchased in transaction (a) for $125 per share, less a $450 brokerage fee.
d. The December 31 end-of-year or market value of the company's short-term investments consisting solely of the Orbital Company stock, equaled $37,475.

Solution:

Short-Term Investments
72,750
 
     Cash [(600 x $120) + $750]
 
72,750

Cash (600 x $2.50)
1,500
 
     Dividends Revenue
 
1,500

Cash [(300 x $125) - $450]
37,050
 
     Short-Term Investments ($72,750/2)
 
36,375
     Gain on Sale of Short-Term Investments
 
675

Market Adjustment-Available-for-Sale ($37,475 - $36,375)
1,100
 
     Unrealized Gain
 
1,100