On June 30, 2016, Slick Rocks, Inc., purchased 10,600 shares of Sandstone stock for $21 per share. Management recorded the stock in the available-for-sale securities portfolio. The following information pertains to the price per share of Sandstone stock:
| Price | |||
| 12/31/2016 | $ | 26 | |
| 12/31/2017 | 23 | ||
| 12/31/2018 | 30 | ||
Slick Rocks sold all of the Sandstone stock on February 14, 2019, at a price of $32 per share.
Prepare any journal entries that are required by the facts presented in this case.
June 30, 2016: Investments in AFS securities = (10,600 shares × $21) = 222,600
Computations:
| Year | Fair Value | − | Book Value before Adjustment | = | Amount for Adjusting Entry | |||||||||
| 2016 | $275,600 | − | $222,600 | = | + | $53,000 | ||||||||
| ($26 × 10,600) shares | ($21 × 10,600 shares) | |||||||||||||
| 2017 | 243,800 | − | 275,600 | = | − | 31,800 | ||||||||
| ($23 × 10,600 shares) | (from prior fair value) | |||||||||||||
| 2018 | 318,000 | − | 243,800 | = | + | 74,200 | ||||||||
| ($30 × 10,600 shares) | (from prior fair value) | |||||||||||||
| Balance in net unrealized gains (losses) | + | $95,400 | ||||||||||||
February 14, 2019: Cash = (10,600 shares × $32) = 339,200
Note: The net unrealized gains (losses) account is a balance sheet account. It does not affect the computation of net income each year. Because it is a balance sheet account, it maintains its balance from year to year. Therefore, the decline in stock price that occurs in 2017 is reported as an adjustment to the net unrealized gains (losses) account. When the stock is sold in 2019, the net unrealized gains (losses) is closed, and the difference between the purchase price (original cost) and the selling price is reported as a gain on the income statement.
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