Question

In January 2020, the management of Sheridan Company concludes that it has sufficient cash to permit some short-term investments in debt and stock securities. During the year, the following transactions occurred.
Feb. 1 Purchased 500 shares of Muninger common stock for $27,500.
Mar. 1 Purchased 700 shares of Tatman common stock for $17,500.
Apr. 1 Purchased 40 $1,050, 6% Yoakem bonds for $42,000. Interest is payable semiannually on April 1 and October 1.
July 1 Received a cash dividend of $0.50 per share on the Muninger common stock.
Aug. 1 Sold 167 shares of Muninger common stock at $65 per share.
Sept.1 Received a $1 per share cash dividend on the Tatman common stock.
Oct. 1 Received the semiannual interest on the Yoakem bonds.
Oct. 1 Sold the Yoakem bonds for $41,000.

Required:
At December 31, the fair value of the Muninger common stock was $56 per share. The fair value of the Tatman common stock was $24 per share. Prepare the adjusting entry at December 31, 2020, to report the investment securities at fair value. All securities are considered to be trading securities.

Answer 1

Answer:

Sheridan Company

Adjusting Entries for reporting fair values of investments:

December 31, 2020:

Debit Investment in Muninger $333

Credit Unrealized Gains on Investment $333

To record the fair value of common stock investment.

Debit Unrealized Loss on Investment $700

Credit Investment in Tatman $700

To record the fair value of common stock investment.

Explanation:

a) Feb. 1, Muniger Common Stock  500 shares at $55  for $27,500

August 1, Sold                                  167 shares at $65 for  $10,855

December 31 Remaining at fair value, 333 shares at $56 for $18,648

Fair Value Gain = $1 x 333 shares = $333

b) Tatman Common Stock  700 shares for $17,500

March 1, Common Stock 700 shares at $25 for $17,500

December 31, Remaining at fair value, 700 shares at $24 for $16,800

Fair Value Loss = $1 x 700 = $700

c) Trading Investments are held for short-term purposes to take advantage of dividends and changes in the market price of the investments.  These securities are accounted for at fair value.  The requirement is that at the end of the accounting period, the fair value is determined and used to value the investment.  Unrealized Gains or Losses are recorded, depending on their fair values.  The gains or losses become realized when the investments are sold.