CA17-2 (Equity Securities) Lexington Co. has the following available-for-sale securities outstanding on December 31, 2014 (its first year of operations).
Cost, Fair Value (respectively)
Greenspan Corp. Stock $20,000 $19,000
Summerset Company Stock 9,500 8,800
Tinkers Company Stock 20,000 20,600
Totals $49,500 $48,400
During 2015, Summerset Company stock was sold for $9,200, the difference between the $9,200 and the “fair value” of $8,800 being recorded as a “Gain on Sale of Investments.” The market price of the stock on
December 31, 2015, was Greenspan Corp. stock $19,900; Tinkers Company stock $20,500.
Instructions
(a) What justification is there for valuing available-for-sale securities at fair value and reporting the unrealized gain or loss as part of stockholders’ equity?
(b) How should Lexington Company apply this rule on December 31, 2014? Explain and prepare journal entry.
(c) Did Lexington Company properly account for the sale of the Summerset Company stock? Explain.
(d) Are there any additional entries necessary for Lexington Company at December 31, 2015, to reflect the facts on the financial statements in accordance with generally accepted accounting principles? Explain. (AICPA adapted)