American Surety and Fidelity buys and sells securities expecting to earn profits

Question

American Surety and Fidelity buys and sells securities expecting to earn profits on short-term differences in price. For the first 11 months of 2018, gains from selling trading securities totaled $5 million, losses were $15 million, and the company had earned $5 million in investment revenue. The following selected transactions relate to American's trading account and equity securities investment account during December 2018, and the first week of 2019. The company's fiscal year ends on December 31. No trading securities were held by American on December 1, 2018 2018 Dec. 12 Purchased FF&G Corporation bonds for $17 million 13 Purchased 2 million Ferry Intercommunications common shares for $24 million. 15 Sold the FF&G Corporation bonds for $17.9 million. 22 Purchased U.S. Treasury bills for $84 million and Treasury bonds for $83 million 23 Sold half the Ferry Intercommunications common shares for $11 million. 26 Sold the U.S. Treasury bills for $90 million. 27 Sold the Treasury bonds for $82 million. 28 Received cash dividends of $200,000 from the Ferry Intercommunications common shares. 31 Recorded any necessary adjusting entry (s) and closing entries relating to the investments. The market price oif the Ferry Intercommunications stock was $11 per share. 2019 Jan. 2 Sold the remaining Ferry Intercommunications common shares for $11.3 million. 5 Purchased Warehouse Designs Corporation bonds for $52 million. Required 1. Prepare the appropriate journal entry for each transaction or event during 2018 2. Indicate any amounts that American would report in its 2018 balance sheet and income statement as a result of these investments 3. Prepare the appropriate journal entry for each transaction or event during 2019

Explanation / Answer

Solution-1 Date Acount Head and Details Debit Credit 12-12 Investment in Bonds -Held for trading 17 Cash 17 13-12 Investment in Equity stock-Held for trading 24 Cash 24 15-12 Cash 17.9 Gain on sale of investment in Bonds 0.9 Investment in Bonds -Held for trading 17 22-12 Investment in Treasury bill-Held for trading 84 Cash 84 23-12 Cash 11 Loss on sale of Investment in Equity stock-Held for trading 1 Investment in Equity stock-Held for trading 12 22-12 Investment in Treasury Bonds-Held for trading 83 Cash 83 27-12 Cash 82 Loss on sale of investment in treasury Bonds 2 Investment in Treasury Bonds-Held for trading 84 28-12 Cash 0.2 Dividend Income 0.2 31-12 Unrealized Loss on mark to market 4 Investment in Equity stock-Held for trading 4 ($11X1 Million)-12Million-5 Million Other ( 5-15) Solution-2 Income Statement Dividend Income 0.2 Unrealized loss on investment 4 Relised Loss on investment (1+2-0.9) 2.1 Net Loss 6.3 Balance Sheet Current Assets Shorterm Investment 82 Solution-3 02-Jan-14 Cash 11.3 Investment in Equity stock-Held for trading 11 Gain on sale of investment inequity stock 0.3 05-Jan-14 Investment in Bonds-Held for trading 52 Cash 52

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