Question

Securities held-to-maturity, securities available for sale, and trading securities

Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division. From time to time the company buys and sells securities intending to earn profits on short-term differences in price. The following selected transactions relate to Amalgamated’s investment activities during the last quarter of 2016 and the first month of 2017. The only securities held by Amalgamated at October 1 were $30 million of 10% bonds of Kansas Abstractors, Inc., purchased on May 1 at face value. The company’s fiscal year ends on December 31.

2016
Oct. 18	Purchased 2 million preferred shares of Millwork Ventures Company for $58 million as a speculative investment to be sold under suitable circumstances.
31	Received semiannual interest of $1.5 million from the Kansas Abstractors bonds.
Nov.   1	Purchased 10% bonds of Holistic Entertainment Enterprises at their $18 million face value, to be held until they mature in 2018. Semiannual interest is payable April 30 and October 31.
1	Sold the Kansas Abstractors bonds for $28 million because rising interest rates are expected to cause their fair value to continue to fall.
Dec.   1	Purchased 12% bonds of Household Plastics Corporation at their $60 million face value, to be held until they mature in 2028. Semiannual interest is payable May 31 and November 30.
20	Purchased U. S. Treasury bonds for $5.6 million as trading securities, hoping to earn profits on short-term differences in prices.
21	Purchased 4 million common shares of NXS Corporation for $44 million as trading securities, hoping to earn profits on short-term differences in prices.
23	Sold the Treasury bonds for $5.7 million.
29	Received cash dividends of $3 million from the Millwork Ventures Company preferred shares.
31	Recorded any necessary adjusting entry(s) and closing entries relating to the investments. The market price of the Millwork Ventures Company preferred stock was $27.50 per share and $11.50 per share for the NXS Corporation common. The fair values of the bond investments were $58.7 million for Household Plastics Corporation and $16.7 million for Holistic Entertainment Enterprises.
2017
Jan.    7	Sold the NXS Corporation common shares for $43 million.

Required:

Prepare the appropriate journal entry for each transaction or event.

Answer 1

18-Oct	Investment in Millwork Ventures preferred shares	58
	Cash		58
31-Oct	Cash	1.5
	Investment revenue		1.5
01-Nov	Investment in Holistic Entertainmentbonds	18
	Cash		18
01-Nov	Cash	28
	Loss on sale of investments.	2
	Investment in Kansas Abstractors bonds		30
01-Dec	Investment in Household Plastics bonds.	60
	Cash		60
20-Dec	Investment in U.S. Treasury bonds	5.6
	Cash		5.6
21-Dec	Investment in NXS common shares	44
	Cash		44
23-Dec	Cash	5.7
	Investment in U.S. Treasury bonds		5.6
	Gain on sale of investments		0.1
29-Dec	Cash	3
	Investment revenue		3
	Investment revenue receivable - Holistic Entertainment	0.3
	Investment revenue receivable - Household Plastics	0.6
	Investment revenue		0.9
	Holistic Entertainment investment revenue = ($18,000,000 x 10%) x 2/12 = $300,000 Household Plastics investment revenue = ($60,000,000 x 12%) x 1/12 = $600,000
	Revaluations:
	Net unrealized holding gains and losses—OCI	3
	Fair value adjustment		3
	Millwork Venture shares (2,000,000 shares x $27.50) - $58,000,000 = -$3,000,000
	Fair value adjustment	2
	Net unrealized holding gains and losses—I/S		2
	NXS shares (4,000,000 x $11.50) - $44,000,000 = $2,000,000
	Note: Securities held-to-maturity are not adjusted to fair valu
	Closing entry:
	Net unrealized holding gains and losses—I/S (NXS)	2
	Investment revenue	5.4
	Gain on sale of investments (U.S. Treasury bonds)	0.1
	Loss on sale of investments (Kansas Abstractors)		2
	Income summary (balance).		5.5
07-Jan	Cash	43
	Loss on sale of investments (to balance)	1
	Investment in NXS common shares (account balance).		44
31-Dec	Net unrealized holding gains and losses—I/S	2
	Fair value adjustment (account balance)		2

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