American Surety and Fidelity buys and sells securities expecting
to earn profits on short-term differences in price. For the first
11 months of 2021, gains from selling trading securities totaled $7
million, losses from selling trading securities were $11 million,
and the company had earned $5 million in interest revenue. The
following selected transactions relate to American's investments in
trading securities and equity securities during December 2021, and
the first week of 2022. The company's fiscal year ends on December
31. No trading securities or equity investments were held by
American on December 1, 2021. Assume that the bonds are purchased
at face value.
2021 | ||||
Dec. | 12 | Purchased FF&G Corporation bonds for $16 million. | ||
13 | Purchased 2 million shares of Ferry Intercommunications common stock for $30 million. American does not have significant influence over Ferry's operations or policies. | |||
15 | Sold the FF&G Corporation bonds for $16.4 million. | |||
22 | Purchased U.S. Treasury bills for $56 million and Treasury bonds for $69 million. | |||
23 | Sold half the shares of Ferry Intercommunications common stock for $13 million. | |||
26 | Sold the U.S. Treasury bills for $60 million. | |||
27 | Sold the Treasury bonds for $65 million. | |||
28 | Received cash dividends of $200,000 from the Ferry Intercommunications common stock shares. | |||
31 | Recorded any necessary adjusting entry relating to the remaining investment. The market price of the Ferry Intercommunications stock was $13 per share. |
2022 | ||||
Jan. | 2 | Sold the remaining Ferry Intercommunications common stock shares for $13.4 million. | ||
5 | Purchased Warehouse Designs Corporation bonds for $38 million. |
Required:
1. Prepare the appropriate journal entry for each
transaction or event during 2021 including any year-end adjusting
entries.
2. Indicate any amounts that American would report
in its 2021 balance sheet and income statement as a result of these
investments.
3. Prepare the appropriate journal entry for each
transaction or event during 2022.
1) | Amount in milions | ||
Date | Account titles | Debit | Credit |
Dec 12,2021 | Investment in FF&G Corporation bonds | 16 | |
Cash | 16 | ||
Dec 13,2021 | Investment in Ferry Intercommunications | 30 | |
Cash | 30 | ||
Dec 15,2021 | Cash | 16.4 | |
Gain on sale of investment | 0.4 | ||
Investment in FF&G Corporation bonds | 16 | ||
Dec 22,2021 | Investment in U.S. treasury bill | 56 | |
Investment in U.S. treasury bonds | 69 | ||
Cash | 125 | ||
Dec 23,2021 | Cash | 13 | |
Loss on sale of investment | 2 | ||
Investment in Ferry Intercommunications common shares (1/2 x $30 million) | 15 | ||
Dec 26,2021 | Cash | 60 | |
Gain on sale of investment | 4 | ||
Investment in U.S. treasury bill | 56 | ||
Dec 27,2021 | Cash | 65 | |
Loss on sale of investment | 4 | ||
Investment in U.S. treasury bonds | 69 | ||
Dec 28,2021 | Cash | 0.2 | |
Investment Revenue | 0.2 | ||
Dec 31,2021 | Net unrealized holding gains and losses—I/S | 2 | |
Fair value adjustment (Ferry Intercommunication) | 2 | ||
($13 million – [$30million × 1/2]) | |||
Dec 31,2021 | Income summary | 2.4 | |
Investment revenue ($5 + 0.2 million) | 5.2 | ||
Gain on sale of investment ($7 + 0.4 + 4 million) | 11.4 | ||
Loss on sale of investment (11 + 4 +2) | 17 | ||
Net unrealized holding gains and losses—I/S | 2 | ||
2) | Indicate any amounts that American would report in its 2021 balance sheet and income statement as a result of these investments. | ||
Balance sheet | |||
Current Assets | |||
Trading Securities ($30/2) | 15 | ||
Less: Fair value adjustment | 2 | ||
Total | 13 | ||
Income statement | |||
Other Revenue (Expenses) | |||
Investment revenue | 5.2 | ||
Gain (Loss ) on investment) | |||
Gain on sale of investment | 11.4 | ||
Loss on sale of investment (11 + 4 +2) | -17 | ||
Net unrealized holding gains and losses—I/S | -2 | -7.6 | |
Total Other Revenue (Expenses) | -2.4 | ||
3) | Amount in millions | ||
Date | Account Titles | Debit | Credit |
01-01-2022 | Cash | 13.4 | |
Loss on sale of investment | 1.6 | ||
Investment in Ferry Intercommunications (1/2 x $30 million) | 15 | ||
01-12-2022 | Fair value adjustment (account balance) | 2 | |
Net unrealized holding gains and losses—I/S | 2 | ||
01-05-2022 | Investment in Warehouse Designs bonds | 38 | |
Cash | 38 | ||
American Surety and Fidelity buys and sells securities expecting to earn profits on short-term differences in...
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