Question

In: Accounting

Second National Insurance Company provided this information for its trading securities portfolio: Fair Value Security Date...

Second National Insurance Company provided this information for its trading securities portfolio:

Fair Value
Security Date Acquired Acquisition Cost 12/31/16 12/31/17
Company A Common 1/15/16 $ 50,000 $ 60,000 $ 55,000
Company B Common 6/30/16 30,000 25,000 13,000 *
Company C Preferred 2/1/17 20,000 25,000
Company D Common 5/1/17 10,000 12,000

* Second National sold 50% of the Company B common shares for $14,000 on July 1, 2017. Fair value at December 31, 2017 is for the Company B shares remaining in the trading portfolio.

Required:

1-Provide the journal entries to record the fair value adjustment on December 31, 2016. Assume that Second National uses an account entitled Fair value adjustment—trading ­securities to adjust the cost of the trading portfolio to year-end fair values.

2-Provide the entry to record the sale of Company B’s common shares on July 1, 2017. Assume that the last fair value adjustment for these shares was on December 31, 2016.

3-Provide the journal entry and supporting calculations for the fair value adjustment on December 31, 2017.

4-What would the entries to record the sale of Company B common shares on July 1, 2017, have been if this security had been considered an available-for-sale security? Ignore tax effects.

(For all requirements, if no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1-Prepare the entry to adjust investments to fair value at 12/31/2016.

2-Prepare the entry to record the sale of Company B's shares of stock.

3-Prepare the entry to adjust investments to fair value at 12/31/2017.

4-Prepare the entry to record the sale of Company B's shares of stock.

5-Prepare the entry to remove any unrealized gain (loss) on the Company B shares that were sold.

Solutions

Expert Solution

Note : Assuming it to be trading securities for the requirement 1 to 4
Security Acquisition cost Fair value 12/31/16 Fair value adjustment on 12/31/16 Selling price of 50% of Company B common Realized gain/(loss) Fair value 12/31/17 Fair value adjustment on 12/31/17
Company A common 50000 60000 10000 55000 -5000
Company B common 30000 25000 -5000 14000 1500 13000 500
Company C common 20000 25000 5000
Company D common 10000 12000 2000
Note : Assuming Company B common to be available for sale securities in requirement 5
Security Acquisition cost Fair value 12/31/16 Fair value adjustment on 12/31/16 Selling price of 50% of Company B common Realized gain/(loss) Fair value 12/31/17 Fair value adjustment on 12/31/17
Company B common 30000 25000 -5000 14000 -1000 13000 500
Date General Journal Debit Credit
Amount in $
Requirement 1 12/31/16 Fair value adjustment -trading securities 10000 Company A common Shares
Unrealized loss on trading securities 5000 Company B common shares
Fair value adjustment -trading securities 5000 Company B common shares
Unrealized gain on trading securities 10000 Company A common Shares
To record the unrealied loss/gain on trading securities
OR You can also net off above entry as follows
Fair value adjustment -trading securities 5000
Unrealized gain on trading securities 5000
To record the unrealied loss/gain on trading securities
Requirement 2 07/01/17 Cash 14000
Fair value adjsutment on trading securities 2500
Investment in Company B common shares 15000
Realized Gain on sale of trading securities 1500
To record the sale of 50% of common B shares
Requirement 3 12/31/17 Fair value adjustment-trading securities 7500 Company B+C+D common shares
Unrealized loss on trading securities 5000 Company A common Shares
Fair value adjustment-trading securities 5000 Company A common Shares
Unrealized gain on trading securities 7500 Company B+C+D common shares
To record the unrealied loss/gain on trading securities
OR You can also net off above entry as follows
Fair value adjustment -trading securities 2500
Unrealized gain on trading securities 2500
To record the unrealied loss/gain on trading securities
Requirement 4 & 5 12/31/16 Cash 14000
Realized loss on sale of AFS securities 1000
Investment in Company B common shares 12500
Fair value adjustment-AFS securities(OCI) 2500
To record the sale of 50% of common B shares
AFS means available for sale &
OCI means Other Comprehensive Income

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