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Problem 15-2A (Algo) Recording, adjusting, and reporting available-for-sale debt securities LO P3
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Mead Incorporated began operations in Year 1. Following is a series of transactions and events involving its long-term debt investments in available-for-sale securities.
Year 1
January 20 Purchased Johnson & Johnson bonds for $28,000.
February 9 Purchased Sony notes for $62,190.
June 12 Purchased Mattel bonds for $48,000.
December 31 Fair values for debt in the portfolio are Johnson & Johnson, $30,500; Sony, $52,850; and Mattel, $57,650.
Year 2
April 15 Sold all of the Johnson & Johnson bonds for $31,000.
July 5 Sold all of the Mattel bonds for $41,100.
July 22 Purchased Sara Lee notes for $17,500.
August 19 Purchased Kodak bonds for $20,550.
December 31 Fair values for debt in the portfolio are Kodak, $19,950; Sara Lee, $19,500; and Sony, $65,000.
Year 3
February 27 Purchased Microsoft bonds for $159,800.
June 21 Sold all of the Sony notes for $63,600.
June 30 Purchased Black & Decker bonds for $57,900.
August 3 Sold all of the Sara Lee notes for $16,500.
November 1 Sold all of the Kodak bonds for $25,350.
December 31 Fair values for debt in the portfolio are Black & Decker, $59,100; and Microsoft, $160,100.
Problem 15-2A (Algo) Part 3
3. Complete the following table that summarizes (a) the realized gains and losses and (b) the unrealized gains or losses for the portfolio of long-term available-for-sale debt securities at each year-end. (Losses should be indicated by a minus sign.)

Answer 1

Acme Bank's balance sheet changes from a Fed open market purchase with an increase in reserves and a decrease in bonds, followed by the bond sale proceeds being converted into new loans, increasing the loan assets while maintaining deposit and equity levels.

Step-by-step explanation:

When the Federal Reserve (Fed) conducts an open market purchase, it buys Treasury bonds from banks like Acme Bank, increasing the banks' reserves. This process directly impacts the balance sheet of Acme Bank. Let's sketch out the balance sheet changes for Acme Bank.

Initial Balance Sheet:

Assets: Reserves $30 million, Bonds $50 million, Loans $50 million
Liabilities: Deposits $100 million, Equity $30 million

After Fed's Open Market Purchase:

Transaction: Fed buys $10 million in Treasury bonds from Acme Bank.

Assets: Reserves increase by $10 million (to $40 million), Bonds decrease by $10 million (to $40 million).
Liabilities: Remain unchanged at Deposits $100 million, Equity $30 million.

After Acme Converts Bond Sale Proceeds to New Loans:

Assets: Loans increase by $10 million (to $60 million), Reserves remain at $40 million (assuming no reserve requirement changes).
Liabilities: Remain unchanged at Deposits $100 million, Equity $30 million.

Acme Bank has used the additional reserves from the bond sale to issue new loans, thereby increasing its assets in the form of loans and maintaining its deposits and equity at the initial levels.