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 $7 million, losses from selling trading securities were $10 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 $20 million.

13 Purchased 2 million shares of Ferry Intercommunications common stock for $24 million. American does not have significant influence over Ferry's operations or policies.

15 Sold the FF&G Corporation bonds for $20.8 million. 22 Purchased U.S. Treasury bills for $64 million and Treasury bonds for $73 million.

23 Sold half the shares of Ferry Intercommunications common stock for $10 million.

26 Sold the U.S. Treasury bills for $66 million. 27 Sold the Treasury bonds for $69 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 $10.3 million.

5 Purchased Warehouse Designs Corporation bonds for $42 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

Note: Equity invesments are considered as available for sale securities.

1.

2021

Dec 12

Trading Securities 20,000,000

Bank 20,000,000

Dec 13

Equity Investments 24,000,000

Bank 24,000,000

Dec 15

Bank 20,800,000

Trading Securities 20,800,000

Dec 22

Trading Securities 137,000,000

Bank 137,000,000

Dec 23

Bank 10,000,000

Loss on Equity 2,000,000

Equity Investments 12,000,000

Dec 26

Bank 66,000,000

Trading Securities 66,000,000

Dec 27

Bank 69,000,000

Trading Securities 69,000,000

Dec 28

Bank 200,000

Dividends 200,000

Dec 31

Unrealised gains / losses on equity investment 2,000,000

Equity Investments   2,000,000

Income Statement 1,200,000

Trading securities 1,200,000

(transfer the balance as there are no securities)

Dividends 200,000

Income Statement 200,000

2).

Income Statement for Dec 2021

Sales 155,800,000

Purchases 157,000,000

Loss on Trading (1,200,000)

Dividends 200,000

Loss on equity 2,000,000

Investment Income (1,800,000)

Income Statement for 2021

Loss on Trading (3,000,0000+1,200,000) (4,200,000)

Investment Income (5,000,000-1,800,000) 3,200,000

Net Income / (loss) (1,000,000)

Items to be reported in Balancesheet 2021

Assets:

Equity Investments at cost 12,000,000

Capital & Liabilities:

Capital xxxxxx

Unrealised gains / losses on equity investment (2,000,000)

Loss for 2021 (1,000,000)

3.

2022

Jan 5

Trading Securities 42,000,000

Bank 42,000,000

Jan 3

Bank 10,300,000

Equity Investments 10,000,000

Unrealised gains / losses on equity investment 300,000

Jan 3

Income statement 100,000

Unrealised gains / losses on equity investment 100,000