On February 18, 2018, Union Corporation purchased $1,491,000 of IBM bonds. Union will hold the bonds indefinitely, and may sell them if their price increases sufficiently. On December 31, 2018, and December 31, 2019, the market value of the bonds was $1,449,000 and $1,512,000, respectively. Prepare the adjusting entry for December 31, 2018 and 2019. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

On December 31, 2018: Debit Loss on available for sale security for $42,000; and Credit Available for sale investment for $42,000.

On December 31, 2019: Debit Available for sale investment $63,000; Credit Loss on available for sale security for $42,000; and Credit Gain on available for sale of securities for $21,000.

Explanation:

Since the bonds are held for trading purpose, they therefore fall under the category of available for sale investment.

The adjusting entry for December 31, 2018 and 2019 will therefore look as follows:

Date            Account Title                                           Debit ($)       Credit ($)  

Dec. 2018   Loss on available for sale security (w.1)   42,000

                   Available for sale investment                                      42,000

                   (To record change in the value of IBM bonds.)                            

Dec. 2019  Available for sale investment                    63,000

                   Loss on available for sale security                              42,000

                  Gain on available for sale of securities (w.2)               21,000

                  (To record gain on fair value of IBM bonds.)                                

Workings:

w.1: Loss on available for sale security = Purchase price - Market value on December 31, 2018 = $1,491,000 - $1,449,000 = $42,000

w.2: Gain on available for sale of securities = Market value on December 31, 2018 - Purchase price = $1,512,000 - $1,491,000 = $21,000

Note:

The loss and and for each of the years 2018 and 2019 respectively are recorded under Other Comprensive Income (OCI) in the Income Statement.

Before action $33,000

After stock dividend $35,310

After stock split $146,200

Explanation:

BEFORE ACTION

Stockholder Equity:

Paid In Capital

Common Stock $330,000

In Exess Par Value $0

Total Paid In Capital $330,000

Retained Earnings $896,000

Total StockholderEquity $1,226,000

Oustanding Shares $33,000

AFTER STOCK DIVIDEND

Stockholder Equity:

Paid In Capital

Common Stock $353,100

(7%×330,000+330,000)

In Exess Par Value $6,600

(33,000/5)

Total Paid In Capital $359,700

Retained Earnings $866,300

Total StockholderEquity $1,226,000

Oustanding Shares $35,310

AFTER STOCK SPLITS

Stockholder Equity:

Paid In Capital

Common Stock $330,000

In Exess Par Value $0

Total Paid In Capital $330,000

Retained Earnings $896,000

Total StockholderEquity $1,226,000

Oustanding Shares $146,200