In: Accounting
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.
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.
1 & 3 ) Journal Entries
Date | Particulars | L/F | debit in million | Credit in million |
Dec-12-2021 | Investment in FF&G Bonds A/c Dr To Cash [Being the purchase of FF&G Bonds] |
$12 | $12 | |
Dec-13 | Investment in Ferry Common shares A/c Dr To Cash [Being the purchase of Ferry common shares] |
$22 | $22 | |
Dec-15 | Cash A/c Dr To Investment in FF&G Bonds To Gain on sale of investment [Being sale of FF&G Bonds] |
$12.10 | $12 $0.10 |
|
Dec-22 | Investment in U.S. Treasury bills A/c Dr Investment in U.S. treasury Bonds A/c Dr To Cash [Being purchase of U.S. Treasury bills and Bonds] |
$56 $65 |
$121 | |
Dec-23 | Cash A/c Dr Loss on sale of Investments A/c Dr To Investment in Ferry common shares [Being sale of the half of the shares of Ferry] |
$10 $ 1 |
$11 | |
Dec-26 | Cash A/c Dr To Investment in Us Treasury bills To Gain on sale of investment [Being sale of Us Treasury bills] |
$ 57 | $56 $1 |
|
Dec-27 | Cash A/c Dr Loss on sale of investments A/c Dr To Investment in Us Treasury bonds A/c [Being sale of Us Treasury Bonds ] |
$63 $2 |
$65 | |
Dec-28 | Cash A/c Dr To Investment Revenue A/c [Being Dividend record from Ferry] |
$0.20 | $0.20 | |
Dec-31 | Net unrealized holding gain/loss A/c Dr To Fair value of adjustment A/c [Being fair value adjustment of AFS investment] |
$1 | $1 |
Journal Entries
Date | Particulars | L/F | Debit million | Credit million |
Jan-2,2022 | Cash A/c Dr Loss on sale of Investment A/c Dr To Investment in Ferry common shares [Being sale of ferry common shares] |
$10.20 $0.80 |
$11 | |
Jan-5 | Investment in ware house bonds A/c Dr To Cash A/c [Being purchase of ware house bonds] |
$34 | $34 |
2) Income statement for the year 2021
Investment Revenue Gain on sale of investments Less:- Loss on sale of investment Net unrealized holding gain/loss |
$0.20 $1.10 ($3.00) $ 1.00 |
Balance Sheet ( Partial)
Assets:- Short Term investment:- Investment in Ferry Common Shares Less:- Fair value adjustments |
$11 ($1) |
$10 |
Date | Particulars | L/F | debit in million | Credit in million |
Dec-12-2021 | Investment in FF&G Bonds A/c Dr To Cash [Being the purchase of FF&G Bonds] |
$12 | $12 | |
Dec-13 | Investment in Ferry Common shares A/c Dr To Cash [Being the purchase of Ferry common shares] |
$22 | $22 |