Question

Rantzow-Lear Company buys and sells debt securities expecting to earn profits on short-term differences in price, and holds these investments in its trading portfolio. The company's fiscal year ends on December 31. The following selected transactions relating to Rantzow-Lear's trading account occurred during December 2021 and the first week of 2022. 2021 Dec. 17 Purchased 160 Grocers Supply Corporation bonds at par 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 bond was $4,000 per bond. 2022 Jan. 5 Sold the Grocers' Supply Corporation bonds for $624,000. Required: 1. Prepare the appropriate journal entry or entries for each transaction. 2. Indicate any amounts that Rantzow-Lear Company would report in its 2021 balance sheet and income statement as a result of this investment.

Answer 1

Rantzow-Lear Company

1. December 17, 2021

Investment in bonds. Dr. $560,000

To Cash. $560,000

(To record the amount invested)

December 28, 2021

Cash. Dr. $4,400

To Investment (Interest) Revenue. $4,400

(To record interest received on investment)

December 31, 2021

Fair Value Adjustment Dr $80,000

To Unrealized holding gains - NI $80,000

((160 * $4,000) - $560,000))

(To record adjustment of trading securities to fair market value)

January 5, 2022

Unrealized Holding gain. Dr. $16,000

To Fair Value Adjustment. $16,000

($80,000 - ($624,000 - $560,000))

Cash. Dr. $624,000

To Fair Value Adjustment. $64,000

To Investment in Bonds. $560,000

(To record sales of bond)

2. Balance Sheet at December 31

Current Asset

Purchase Value $560,000

Fair Value Adjustment $80,000

$640,000

Income Statement

Investment (Interest) Revenue $5,800

Unrealized holding gains - NI $80,000

Loreal American Corporation

1. Unrealized loss is = (Short term loss - Long term gain) = ($73,000 - $34,000) = $39,000

Adjusting entry:

31 - Dec 21

Net Unrealized Holding Gain/ Loss. Dr. $39,000

To Fair Value Adjustment. $39,000

(Entry for Net Unrealized loss on available for sale securities)

2. None, as the Net Unrealized Holding Gain/ Loss would be reported in Other Comprehensive Income, which is a component of Stockholder's equity.

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