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Financial Accounting: In an Economic Context by Jamie Pratt

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EXERCISES

E8-1

Accounting for short-term equity securities

Monroe Auto Supplies engaged in several transactions involving short-term equity securities during 2011, shown in the following list. The company had never invested in equity securities prior to 2011. All securities were classified as trading securities.

  1. Purchased 1,000 shares of IBM for $50 per share.
  2. Purchased 500 shares of General Motors for $80 per share.
  3. Sold 750 shares of IBM for $60 per share.
  4. Received a dividend of $1.50 per share from General Motors. Assume that the dividend was declared in a previous period.
  5. Purchased 200 shares of Xerox for $40 per share.
  6. Sold the remaining 250 shares of IBM for $30 per share.
  7. Sold the 200 shares of Xerox for $58 per share.
  8. Sold the 500 shares of General Motors for $60 per share.

a. Prepare journal entries for each transaction.

b. What effect did these transactions have on the company's 2011 net income?

E8-2

Mark-to-market accounting

The following information was extracted from the December 31, 2011, current asset section of the balance sheets of four different companies:

image

There were no transactions in short-term equity securities during 2012, and as of December 31, 2012, the controllers of each company collected the following information:

image

a. Compute the change in the wealth levels ...

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