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 2018, gains from selling trading securities totaled $8 million, losses were $11 million, and the company had earned $5 million in investment revenue. The following selected transactions relate to American's trading account and equity securities investment account during December 2018, and the first week of 2019. The company's fiscal year ends on December 31. No trading securities were held by American on December 1, 2018.

2018
Dec.		12		Purchased FF&G Corporation bonds for $12 million.
		13		Purchased 2 million Ferry Intercommunications common shares for $22 million.
		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 Ferry Intercommunications common shares 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 shares.
		31		Recorded any necessary adjusting entry(s) and closing entries relating to the investments. The market price of the Ferry Intercommunications stock was $10 per share.

2019
Jan.		2		Sold the remaining Ferry Intercommunications common 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 2018.
2. Indicate any amounts that American would report in its 2018 balance sheet and income statement as a result of these investments.
3. Prepare the appropriate journal entry for each transaction or event during 2019.

Answer 1

1)

		($ in million)	($ in million)
Date	Account Titles and Explanation	Debit	Credit
Dec-12	Investment in FF&G Corporation Bonds	12
	Cash		12
Dec-13	Investment in Ferry Intercommunication	22
	Cash		22
Dec-15	Cash	12.1
	Investment in FF&G Corporation Bonds		12
	Gain on sale of investment		0.1
Dec-22	Investment in US Treasury Bills	56
	Investment in US Treasury Bonds	65
	Cash		121
Dec-23	Cash	10
	Loss on sale of investment	1
	Investment in Ferry Intercommunication ($22 million * 1/2)		11
Dec-26	Cash	57
	Investment in US Treasury Bills		56
	Gain on sale of investment		1
Dec-27	Cash	63
	Loss on sale of investment	2
	Investment in US Treasury Bonds		65
Dec-28	Cash	0.2
	Investment Revenue		0.2
Dec-31	Unrealised gain/loss on investments	1
	Fair Value adjustment		1
	[Adjusting Entry]
Dec-31	Investment Revenue [$5 million+ $0.2 Million	5.2
	Gain on sale of investment $8+0.1+1 million]	9.1
	Income Summary (balance fig.)	0.7
	Loss on sale of investment [$11+1+2 million]		14
	Unrealised gain/loss on investments		1

2.

Balance Sheet as at 2018:

Trading Securities [ $22million *1/2]	11
Less: Fair Value Adjustment	(1)
Net Investment	10

Income Statement as at 2018:

Investment Revenue	5.2
Gain on Sale of investment	9.1
Loss on Sale of Investment	(14)
Unrealised gain/loss on investments	(1)

3)

2019		($ in million)	($ in million)
Date	Account Titles and Explanation	Debit	Credit
Jan-02	Cash	10.2
	Loss on sale of investment	0.8
	Investment in Ferry Intercommunication		11
Jan-05	Investment in Warehouse Designs Corporation	34
	Cash		34
Dec-31	Fair Value adjustment	1
	Unrealised gain/loss on investments		1
	[Reversal of adjustment entry]