Question

 

Mead Inc. began operations in Year 1, following is a series of transactions and events involving its long-term debt investments in available-for-sale securities.

Year 1

Jan.		20		Purchased Johnson & Johnson bonds for $29,500.
Feb.		9		Purchased notes of Sony for $63,540.
June		12		Purchased bonds of Mattel for $49,500.
Dec.		31		Fair values for debt in the portfolio are Johnson & Johnson, $32,300; Sony, $55,750; and Mattel, $57,850.

Year 2

Apr.		15		Sold all of the bonds of Johnson & Johnson for $32,500.
July		5		Sold all of the bonds of Mattel for $42,150.
July		22		Purchased notes of Sara Lee for $18,700.
Aug.		19		Purchased bonds of Kodak for $21,600.
Dec.		31		Fair values for debt in the portfolio are Kodak, $22,475; Sara Lee, $21,000; and Sony, $65,000.

Year 3

Feb.		27		Purchased bonds of Microsoft for $158,200.
June		21		Sold all of the notes of Sony for $64,800.
June		30		Purchased bonds of Black & Decker for $59,400.
Aug.		3		Sold all of the notes of Sara Lee for $17,850.
Nov.		1		Sold all of the bonds of Kodak for $26,325.
Dec.		31		Fair values for debt in the portfolio are Black & Decker, $60,000; and Microsoft, $160,400.

1. Prepare journal entries to record these transactions and the year-end fair value adjustments to the portfolio of long-term available-for-sale debt securities.

2. Complete the following table that summarizes the (a) total cost, (b) total fair value adjustment, and (c) total fair value of the portfolio of long-term available-for-sale debt securities at each year-end. (Loss amounts should be indicated with a minus sign.)

3. Complete the following table that summarizes (a) the realized gains and losses and (b) the unrealized gains or losses for the portfolio of long-term available-for-sale debt securities at each year-end. (Losses should be indicated by a minus sign.)

Answer 1

1) Journal Entries
Date	Account titles	Debit	Credit
Year 1
Jan.20	Long-Term Investments—AFS (J&J)	29500
	Cash		29500
	Purchased Johnson & Johnson shares
Feb.9	Long-Term Investments—AFS (Sony).	63540
	Cash		63540
	Purchased Sony shares
June.12	Long-Term Investments—AFS (Mattel)	49500
	Cash		49500
	Purchased Mattel shares
Dec.31	Market Adjustment—AFS (LT)	3360
	Unrealized Gain - Equity		3360
	Annual adjustment to market values
Year 1		Cost	Fair Value	Profit/(loss)
	Johnson	29500	32300	2800
	Sony	63540	55750	-7790
	Mattel	49500	57850	8350
	Total	142540	145900	3360
Year 2
Apr.15	Cash	32500
	Gain on Sale of Investments		3000
	Long-Term Investments—AFS (J&J)		29500
	Sold Johnson & Johnson shares
Jul.5	Cash	42150
	Loss on Sale of Investments	7350
	Long-Term Investments—AFS (Mattel)		49500
	Sold Mattel shares
Jul.22	Long-Term Investments—AFS (Sara Lee)	18700
	Cash		18700
	Purchased Sara Lee shares
Aug.19	Long-Term Investments—AFS (Kodak)	21600
	Cash		21600
	Purchased Eastman Kodak shares
Dec. 31	Market Adjustment—AFS (LT)	1275
	Unrealized Gain - Equity		1275
	Annual adjustment to market values
Year 2		Cost	Fair value	Gain/(Loss)
	Kodak	21600	22475	875
	Sara lee	18700	21000	2300
	Sony	63540	65000	1460
	Total	103840	108475	4635
	Fair Value Adjustment account:
	Required balance	4635	dr.
	Unadjusted balance	3360	dr.
	Required change	1275	dr.
year 3
Feb.27	Long-Term Investments—AFS (Microsoft)	158200
	Cash		158200
	Purchased Microsoft shares
June. 21	Cash	64800
	Gain on Sale of Investments		1260
	Long-Term Investments—AFS (Sony)		63540
	Sold Sony shares
jun. 30	Long-Term Investments—AFS (Black & Decker)	59400
	Cash		59400
	Purchased Black & Decker shares
Aug.3	Cash	17850
	Loss on Sale of Investments	850
	Long-Term Investments—AFS (Sara Lee)		18700
	Sold Sara Lee shares
Nov.1	Cash	26325
	Gain on Sale of Investments		4725
	Long-Term Investments—AFS (E. Kodak)		21600
	Sold Eastman Kodak shares
Dec.31	Market Adjustment—AFS (LT)	7435
	Unrealized Loss—Equity		4635
	Unrealized Gain—Equity		2800
	Annual adjustment to market values
Year 3		Cost	Fair market	Gain/(loss)
	Black & Decker	59400	60000	600
	Microsoft	158200	160400	2200
	Total	217600	220400	2800
	Fair Value Adjustment account:
	Required balance .	2800	cr.
	Unadjusted balance	4635	dr.
	Required change	1835	dr.
b)
	12/31 Year 1	12/31 Year 2	12/31 Year 3
Long-Term AFS Securities (cost)	$1,42,540.00	$1,03,840.00	$2,17,600.00
Market Adjustment	$3,360.00	$4,635.00	$2,800.00
Long-Term AFS Securities (market	$1,45,900.00	$1,08,475.00	$2,20,400.00
c)	Realized gains (losses)
	Year 1	year 2	year 3
Sale of Johnson & Johnson shares.		3000
Sale of Mattel shares		-7350
Sale of Sara Lee shares			-850
Sale of Sony shares			1260
Sale of Eastman Kodak shares			4725
Total realized gain (loss)	0	-4350	5135
Unrealized gains (losses) at year-end	$3,360.00	$4,635.00	$2,800.00