Question

Southeast Bank invests in equity securities and prepares quarterly financial statements. At the beginning of the fourth quarter of 2019, the bank held as an investment in equity securities 160 shares of Eglan Company common stock that originally cost $4,560. At that time, these securities had a fair value of $4,320. During the fourth quarter, the bank engaged in the following transactions:

Oct. 26 Purchased 360 shares of Farrell Company common stock for $38 per share.
Nov. 26 Sold 160 shares of Eglan common stock for $26 per share.
Dec. 10 Purchased 370 shares of Gray Company common stock for $40 per share.

On December 31, 2018, the quoted market prices of the shares were as follows: Eglan Company, $52 per share; Farrell Company, $41 per share; and Gray Company, $39 per share.

Required:
a. Prepare journal entries to record the 2018 transactions for the fourth quarter.
b. Show what the bank reports on its fourth quarter 2018 income statement for these trading securities.
c. Show how the bank reports these trading securities on its balance sheet at the end of the fourth quarter of 2018.

Answer 1

Southeast Bank

a. Journal Entries:

Oct. 26: Debit Investment in Farrell Company $13,680

Credit Cash $13,680

To record the investment in 360 equity shares at $38 per share.

Nov. 26: Debit Cash $4,160

Credit Investment in Eglan Company $4,160

To record the sale of investment in Eglan Company.

Debit Realized Loss on Sale of Investment $400

Credit Investment in Eglan Company $400

To record the realized loss on sale of investment.

Dec. 10: Debit Investment in Gray Company $14,800

Cash $14,800

To record the purchase of 370 shares of common stock at $40 per share.

Dec. 31: Debit Investment in Farrell Company $1,800

Credit Unrealized Gain $1,800

To record the fair value of the investment.

Dec. 31: Debit Unrealized Loss $370

Credit Investment in Gray Company $370

To record the fair value of the investment.

b. Income Statement of fourth quarter, 2018:

Realized Loss on Sale of Investment $400

Unrealized Gain (Farrell Company) $1,800

Unrealized Loss (Gray Company) $370

c. Balance Sheet at the end of the fourth quarter of 2018

Investments:

Farrell Company $15,480 ($13,680 + $1,800)

Gray Company $ 15,170($14,800 - $370)

Step-by-step explanation:

a) Data and Calculations:

Investment in Eglan Company (equity securities 160 shares) = $4,560

Oct. 26: Investment in Farrell Company $13,680 Cash $13,680

(360 equity shares at $38 per share)

Nov. 26: Cash $4,160 Investment in Eglan Company $4,160

Realized Loss on Sale of Investment $400 Investment in Eglan Company $400

Dec. 10: Investment in Gray Company $14,800 Cash $14,800 (370 shares of common stock at $40 per share)

Dec. 31: Investment in Farrell Company $1,800 Unrealized Gain $1,800

Dec. 31: Unrealized Loss $370 Investment in Gray Company $370