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 $4 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.

Purchased Warehouse Designs Corporation bonds for $43 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.

2018 Dec. 12 Purchased FF&G Corporation bonds for $21 million. 13 Purchased 2 million Ferry Intercommunications common shares for $26 million. 15 Sold the FF&G Corporation bonds for $21.9 million. 22 Purchased U.S. Treasury bills for $66 million and Treasury bonds for $74 million. 23 Sold half the Ferry Intercommunications common shares for $11 million. 26 Sold the U.S. Treasury bills for $69 million. 27 Sold the Treasury bonds for $72 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 $11 per share.

Explanation / Answer

Answer 1 & 3. (Amt. in millions) Journal Entry Date Particulars Dr. Amt. Cr. Amt. 2018 12-Dec Investment in FF& G Bonds                                   21.00    Cash         21.00 (To record the purchase of FF&G Bonds) 13-Dec Investment in Ferry Common shares                 26.00    Cash         26.00 (To record the purchase of Ferry Common Shares) 15-Dec Cash                                                                                  21.90    Investment in FF & G Bonds         21.00    Gain on Sale of Investments           0.90 (To record the sale of FF&G Bonds) 22-Dec Investment in US Treasury Bills                           66.00 Investment in US Treasury Bonds                       74.00    Cash      140.00 (to record the purchase of US treasury Bills & Bonds) 23-Dec Cash                                                                                  11.00 Loss on Sale of Investments                                     2.00    Investment in Ferry Common Shares         13.00 (To Record sale of the half of Shares of ferry) 26-Dec Cash                                                                                   69.00    Investment in US Treasury Bills         66.00    Gain on Sale of Investments           3.00 (To record the sale of US Treasury Bills) 27-Dec Cash                                                                                   72.00 Loss on Sale of Investments                                     2.00    To Investment in US Treasury Bonds         74.00 (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              2.00    Fair Value Adjustments           2.00 (To record the fair value adjustment of AFS Investments) 31-Dec Investment Revenue                                                    5.20 Gain on Sale of Investment                                        7.90 Income Summary           3.90    Loss on Sale of Investment         15.00    Net Unrealized Holdimg Gain & Losses           2.00 (To record the gain & Loss earned during the period) 2019 2-Jan Cash                                                                                   11.40 Loss on Sale of Investments                                     1.60    Investment in Ferry Common Shares         13.00 (To record the sale of Ferry Common Shares) 5-Jan Investment in Warehouse Bonds                        43.00    Cash         43.00 (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                     13.00 Less: Fair Value Adjustments                     (2.00)         11.00 Income Statement For the Year Ended Dec 31, 2018 Investment Revenue                       5.20 Gain on sale Of Invetesments                       7.90 Loss on Sale of Investments                  (15.00) Net unrealized holding gains and losses on investments                     (2.00)

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