Question

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 $8 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 $12 million. 13 Purchased 2 million shares of Ferry Intercommunications common stock for $22 million. American does not have significant influence over Ferry's operations or policies. 15 Sold the FF&G Corporation bonds for $12.1 million. 22 Purchased u.s. Treasury bills for $56 million and Treasury bonds for $65 million. 23 Sold half the shares of Ferry Intercommunications common stock for $10 million. 26 Sold the U.S. Treasury bills for $57 million. 27 Sold the Treasury bonds for $63 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 $10 per share. 2022 Jan. 2 Sold the remaining Ferry Intercommunications common stock shares for $10.2 million. 5 Purchased Warehouse Designs Corporation bonds for $34 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.

Answer 1

1)		Amount in milions
Date	Account titles	Debit	Credit
Dec 12,2021	Investment in FF&G Corporation bonds	12
	Cash		12
Dec 13,2021	Investment in Ferry Intercommunications	22
	Cash		22
Dec 15,2021	Cash	12.1
	Gain on sale of investment		0.1
	Investment in FF&G Corporation bonds		12
Dec 22,2021	Investment in U.S. treasury bill	56
	Investment in U.S. treasury bonds	65
	Cash		121
Dec 23,2021	Cash	10
	Loss on sale of investment	1
	Investment in Ferry Intercommunications common shares (1/2 x $22 million)		11
Dec 26,2021	Cash	57
	Gain on sale of investment		1
	Investment in U.S. treasury bill		56
Dec 27,2021	Cash	63
	Loss on sale of investment	2
	Investment in U.S. treasury bonds		65
Dec 28,2021	Cash	0.2
	Investment Revenue		0.2
Dec 31,2021	Net unrealized holding gains and losses—I/S	1
	Fair value adjustment (Ferry Intercommunication)		1
	($10 million – [$22million × 1/2])
Dec 31,2021	Income summary	0.7
	Investment revenue ($5 + 0.2 million)	5.2
	Gain on sale of investment ($8 + 0.1 + 1 million)	9.1
	Loss on sale of investment (11 + 1 +2)		14
	Net unrealized holding gains and losses—I/S		1
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 ($22/2)	11
	Less: Fair value adjustment	-1
	Total	10
	Income statement
	Other Revenue (Expenses)
	Investment revenue		5.2
	Gain (Loss ) on investment):
	Gain on sale of investment	1.1
	Gain on sale of investment (first 11 months)	8
	Loss on sale of investment (11 + 1+2)	-4
	Loss on sale of investment (first 11 months)	-11
	Net unrealized holding gains and losses—I/S	-1
	Net Loss on investments		-6.9
	Total Other Revenue (Expenses)		-1.7
3)		Amount in millions
Date	Account Titles	Debit	Credit
1/1/22	Cash	10.2
	Loss on sale of investment	0.8
	Investment in Ferry Intercommunications (1/2 x $30 million)		11
12/1/22	Fair value adjustment (account balance)	1
	Net unrealized holding gains and losses—I/S		1
5/1/22	Investment in Warehouse Designs bonds	34
	Cash		34