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    Stock Investment:Transactions & Critical Thinking Case Study

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    On December 31, 2008, Ramey Association owned the following securities, held as a long-term investment. The securities are not held for influence or control of the investee.

    Common Stock Shares Cost
    Hurst Co. 2,000 $60,000
    Pine Co. 5,000 45,000
    Scott Co. 1.500 30,000

    On December 31, 2008, the total fair value of the securities was equal to its cost. In 2009, the following transactions occurred.
    July 1 Received $1 per share semiannual cash dividend on Pine Co. common stock.
    Aug. 1 Received $0.50 per share cash dividend on Hurst Co. common stock.
    Sept. 1 Sold 1,500 shares of Pine Co. common stock for cash at $8 per share, less brokerage fee of $300.
    Oct. 1 Sold 800 shares of Hurst Co. common stock for cash at $33 per share, less brokerage fee of $500.
    Nov. 1 Received $1 per share cash dividend on Scott Co. common stock.
    Dec. 15 Received $.050 per share cash dividend on Hurst Co. common stock.
    Dec. 31 Received $1 per share semiannual cash dividend on Pine Co. common stock.

    At December 31, the fair value per share of the common stocks were Hurst Co. $32, Pine Co. $8, and Scott Co. $18.

    (a) Journalize the 2009 transactions and post to the account Stock Investments. (Use the T-account form.)
    (b) Prepare the adjusting entry at December 31, 2009, to show the securities at fair value. The stock should be classifies as available-for-sale securities.
    (c) Show the balance sheet presentation of the investments at December 31, 2009. At this date, Ramey Associates has common stock $1,500,000 and retained earnings $1,000,000.

    Decision Making Across the Organization
    At the beginning of the question and answer portion of the annual stockholders' meeting of Kemper Corporation, stockholder Mike Kerwin asks, "Why did management sell the holdings in UMW Company at a loss when this company has been very profitable during the period its stock was held by Kemper?"

    Since president Tony Chavez has just concluded his speech on the recent success and bright future of Kemper, he is taken aback by this question and responds, "I remember we paid $1,300,000 for that stock some years ago, and I am sure we sold that stock at a much higher price. You must be mistaken."

    Kerwin retorts, "Well, right here in footnote number 7 to the annual report it shows that 240,000 shares, a 30% interest in UMW, were sold on the last day of the year. Also, it states that UMW earned $520,000 this year and paid out $160,000 in cash dividends. Further, a summary statement indicates that n past years, while Kemper held UMW stock, UMW earned $1,240,000 and paid out $440,000 in dividends. Finally, the income statement for this year shows a loss on the sale of UMW stock of $180,000. So, I doubt that I am mistaken."

    Red-faced, president Chavez turns to you.

    With the class divided into groups, answer the following.
    (a) What dollar amount did Kemper receive upon the sale of the UMW stock?
    (b) Explain why both stockholder Kerwin and president Chavez are correct.

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    Solution Preview

    The attached MS Excel document shows how the transactions would be journalized and additionally how the adjusting entry for the ...

    Solution Summary

    This solution is comprised of a detailed explanation to a financial accounting problem concerning of how to journalize transactions and an adjusting entry for stock investments. It also contains a short essay to a "Broadening Your Perspective" case problem pertaining to management's decision to sell an investment at a loss when that security was profitable during the period the stock was held.

    The problems shown here are taken from Financial Accounting, 6th ed, Wiley Publishing, however, the detail step-by-step explanation of these complicated topics provides students with a clear understanding of the concepts. Thank you for using BrainMass.com. Have a great day!