Rantzow-Lear Company buys and sells debt securities expecting to earn profits on

Question

Rantzow-Lear Company buys and sells debt securities expecting to earn profits on short-term differences in price. The company’s fiscal year ends on December 31. The following selected transactions relating to Rantzow-Lear’s trading account occurred during December 2018 and the first week of 2019.

2018 Dec. 17 Purchased 160 Grocers' Supply Corporation bonds for $560,000. 28 Received interest of $4,400 from the Grocers’ Supply Corporation bonds. 31 Recorded any necessary adjusting entry relating to the Grocers' Supply Corporation bonds. The market price of the bonds were $4,000 per bond. 2019 Jan. 5 Sold the Grocers' Supply Corporation bonds for $624,000.

Explanation / Answer

SOLUTION:

2018 Debit Credit Dec-17 Investment in Grocers’ Preferred Stock 560,000 Cash 560,000 Dec-31 Cash 4,400 Investment Revenue 4,400 Dec-31 Fair value adjustment 80,000 Net unrealized holding gains and losses-I/S 80,000 (160* 4000 - 560,000) Jan-05 Cash 624,000 Gain on investment 64,000 Investment in Grocer’s supply preferred shares 560,000 Dec-31 Net unrealized holding gains and losses-I/S 640,000 Fair value adjustment 640,000

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