Question

Katz buys and sells securities in short-term periods. The following transactions relate to Katz activity in Dec. of 2014, which has a fiscal year end of Dec. 31. All of the following securities meet the criteria to be classified as trading securities and no other trading securities were held by Katz prior to Dec. 2014.

Dec. 4: Purchased B Corp. Bonds for $12,000,000

Dec. 7: Purchased two-million shares of MU for $20,000,000

Dec. 10: Sold the B Corp. Bonds for $11,900,000

Dec. 15: Purchased US Treasury Bills for $55,000,000 and US Treasury Bonds for $66,000,000.

Dec. 17: Sold 1,000,000 shares MU for $12,000,000

Dec. 21: Sold US Treasury Bills for $57,000,000

Dec. 23: Sold US Treasury Bonds for $65,000,000

Dec. 27: Received payment of cash dividends from MU common chares for $250,000.

Dec. 31: Record any adjusting/closing entries relating to the investments. Market price of MU was $12 per share.

1. Prepare all appropriate journal entries for Dec. 2014
2. Calculate the total to be reported on the 2014 balance sheet for short-term investments.
3. Calculate the total impact to profit reported on 2014 income statement that is a result of the investment activity.

Answer 1

Ans- Journal Entries

Date	Account Title and Explanation	Debit ($)	Credit ($)
2014
Dec.4	Investment in B Corp. A/c Dr.	12,000,000
	Cash A/c		12,000,000
	(To record the bonds purchased of B Corporation)
Dec.7	Investment in MU	20,000,000
	Cash A/c		20,000,000
	(To record the purchased of two-million shares of PU)
Dec.10	Cash A/c	11,900,000
	Loss on sale of investments A/c	100,000
	Investment in B Corp. A/c		12,000,000
	(To record the sale of B Corp. investment in loss)
Dec.15	US Treasury Bills A/c Dr.	55,000,000
	US Treasury Bonds A/c Dr.	66,000,000
	Cash A/c		121,000,000
	(To record the purchase of US Treasury Bills and Bonds)
Dec.17	Cash A/c Dr.	12,000,000
	Investment in MU		10,000,000
	Gain on sale of Investment A/ c		200,000
	(To record the sale of 1,000,000 shares of MU in $12,000,000)
Dec.21	Cash A/c Dr.	57,000,000
	US Treasury Bills A/c		55,000,000
	Gain on sale of bills A/c		2,000,000
	(To record the sale of US Treasury Bills)
Dec.23	Cash A/c Dr.	65,000,000
	Loss on sale of bonds A/c Dr.	1,000,000
	US Treasury Bonds A/c		66,000,000
	(To record the sale of US Treasury Bonds at loss)
Dec.27	Cash A/c Dr.	250,000
	Dividend Revenue A/c		250,000
	(To record the dividend received on MU shares)
Dec.31	Market Adjustment- Available for sale ($12,000,000-$10,000,000)	2,000,000
	Unrealized Gain or (Loss)		2,000,000
	(To record the unrealized gain)

Calculation of Unrealized Gain/ (Loss)

Security	Cost	Fair Value
MU Common Stock	$10,000,000 (1,000,000*$10)	$12,000,000 (1,000,000*$12)
	$10,000,000	$12,000,000

Balance Sheet

Assets:-
Short-term Investments (2,000,000-1,000,000 *$10)	10,000,000

There will be net profit of $1,100,000 reported on 2014 income statement as a result of the investment activity.

Total Profit =$200,000+$2,000,000=$2,200,000

Total Loss= $100,000+$1,000,000=$1,100,000

Net Profit = $2,200,000-$1,100,000=$1,100,000