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 2013, gains from selling trading securities totaled $7 million, losses were $14 million, and the company had earned $5 million in investment revenue. The following selected transactions relate to American’s trading account during December 2013, and the first week of 2014. The company’s fiscal year ends on December 31. No trading securities were held by American on December 1, 2013. 2013 Dec. 12 Purchased FF&G Corporation bonds for $24 million. 13 Purchased 2 million Ferry Intercommunications common shares for $22 million. 15 Sold the FF&G Corporation bonds for $24.3 million. 22 Purchased U.S. Treasury bills for $72 million and Treasury bonds for $77 million. 23 Sold half the Ferry Intercommunications common shares for $10 million. 26 Sold the U.S. Treasury bills for $78 million. 27 Sold the Treasury bonds for $74 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 of the Ferry Intercommunications stock was $10 per share. 2014 Jan. 2 Sold the remaining Ferry Intercommunications common shares for $10.2 million. 5 Purchased Warehouse Designs Corporation bonds for $46 million. Required: 1. Prepare the appropriate journal entry for each transaction or event during 2013, including the closing entry to income summary for the year. (If no entry is required for a particular event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) 2. Indicate any amounts that American would report in its 2013 balance sheet and income statement as a result of these investments. (Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) 3. Prepare the appropriate journal entry for each transaction or event during 2014.(If no entry is required for a particular event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Explanation / Answer

Amt in $ millions Date Accounts Debit Credit 12-Dec-13 FF&G Corporation bonds 24 cash 24 13-Dec Ferry Intercommunications common shares 22 cash 22 15-Dec cash 24.3 FF&G Corporation bonds 24 gain on sale of bonds 0.3 22-Dec U.S. Treasury bills 72 Treasury bonds 77 cash 149 23-Dec cash 10 Loss on sale of shares 1 Ferry Intercommunications common shares 11 26-Dec cash 78 U.S. Treasury bills 72 Gain on sale of bills 6 27-Dec cash 74 Loss on sale of bonds 3 Treasury bonds 77 28-Dec cash 0.2 diviend income 0.2 Adjusting entry: 31-Dec unreliased loss on shares 1 Ferry Intercommunications common shares 1 (11 value of share-10 current value=1) Balancesheet value Current asset 31-Dec Ferry Intercommunications common shares 10 2-Jan-14 cash 10.2 Ferry Intercommunications common shares 10 gain on sale of shares 0.2 5-Jan Warehouse Designs Corporation bonds 46 cash 46 income summary 2013 gain on sale of bonds 0.3 Loss on sale of shares -1 Gain on sale of bills 6 Loss on sale of bonds -3 unreliased loss on shares 1 Net income 3.3

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