American Surety and Fidelity buys and sells securities expecting to earn profits
ID: 2545078 • Letter: A
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 $8 million, losses were $11 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 $12 million 13 Purchased 2 million Ferry Intercommunications common shares for $22 million. 15 Sold the FF&G; Corporation bonds for $12.1 million 22 Purchased U.S. Treasury bills for $56 million and Treasury bonds for $65 million 23 Sold half the Ferry Intercommunications common shares for $10 million 26 Sold the U.S. Treasury bills for $57 million 27 Sold the Treasury bonds for $63 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. 2019 Jan. 2 Sold the remaining Ferry Intercommunications common shares for $10.2 million. 5 Purchased Warehouse Designs Corporation bonds for $34 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 2019Explanation / Answer
Answer 1 & 3. (Amt. in millions) Journal Entry Date Particulars Dr. Amt. Cr. Amt. 2018 12-Dec Investment in FF& G Bonds 12.00 Cash 12.00 (To record the purchase of FF&G Bonds) 13-Dec Investment in Ferry Common shares 22.00 Cash 22.00 (To record the purchase of Ferry Common Shares) 15-Dec Cash 12.10 Investment in FF & G Bonds 12.00 Gain on Sale of Investments 0.10 (To record the sale of FF&G Bonds) 22-Dec Investment in US Treasury Bills 56.00 Investment in US Treasury Bonds 65.00 Cash 121.00 (to record the purchase of US treasury Bills & Bonds) 23-Dec Cash 10.00 Loss on Sale of Investments 1.00 Investment in Ferry Common Shares 11.00 (To Record sale of the half of Shares of ferry) 26-Dec Cash 57.00 Investment in US Treasury Bills 56.00 Gain on Sale of Investments 1.00 (To record the sale of US Treasury Bills) 27-Dec Cash 63.00 Loss on Sale of Investments 2.00 To Investment in US Treasury Bonds 65.00 (To record the sale of US Treasury Bonds) 28-Dec Cash 0.20 Investment Revenue 0.20 (To record the dividend recd from Ferry) 31-Dec Net Unrealized Holding Gains & Losses 1.00 Fair Value Adjustments 1.00 (To record the fair value adjustment of AFS Investments) 2019 2-Jan Cash 10.20 Loss on Sale of Investments 0.60 Investment in Ferry Common Shares 11.00 (To record the sale of Ferry Common Shares) 5-Jan Investment in Warehouse Bonds 34.00 Cash 34.00 (to record the purchase of warehouse bonds) Answer 2. Balance Sheet (Partial) As on Dec 31, 2018 Assets Short Term Investments Investment in in Ferry Common Shares 11.00 Less: Fair Value Adjustments (1.00) 10.00 Income Statement For the Period Ended Dec 31, 2018 Investment Revenue 0.20 Gain on sale Of Invetesments 1.10 Loss on Sale of Investments (3.00) Net unrealized holding gains and losses on investments (1.00)
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