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. 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.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. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Answer 1

Sheridan Company

Adjusting Entries for Trading Investments at Fair Value:

December 31, 2020:

Debit Investment in Muninger $333

Credit Gain on Investment $333

To record the $1 per share gain on investment (500 - 167 shares).

Debit Loss on Investment $700

Credit Investment in Tatma $700

To record the $1 per share loss on investment (700 shares).

Step-by-step explanation:

Investments held for trading are short-term investments in debt and stock securities. They are accounted for at fair value.

This implies that at the end of each reporting period, the difference between the book value of the investment and the fair value is adjusted either as gain or loss on investment. This adjusting entry increases or reduces the book value of the investment to its fair value. The gain or loss remains an unrealized gain or loss until the investment is sold.

Answer 2

December 31, 2020, fair value adjustment

Dr Investment in Muninger stocks 333

Cr Unrealized gain - Investment in Muninger stocks 333

December 31, 2020, fair value adjustment

Dr Unrealized loss - Investment in Tatman stocks 700

Cr Investment in Tatman stocks 700

Step-by-step explanation:

Feb. 1 Purchased 500 shares of Muninger common stock for $27,500.

Dr Investment in Muninger stocks 27,500

Cr Cash 27,500

Mar. 1 Purchased 700 shares of Tatman common stock for $17,500.

Dr Investment in Tatman stocks 17,500

Cr Cash 17,500

Apr. 1 Purchased 40 $1,050, 6% Yoakem bonds for $42,000. Interest is payable semiannually on April 1 and October 1.

Dr Investment in Yoakem bonds 42,000

Cr Cash 42,000

July 1 Received a cash dividend of $0.50 per share on the Muninger common stock.

Dr Cash 250

Cr Dividend revenue 250

Aug. 1 Sold 167 shares of Muninger common stock at $65 per share.

Dr Cash 10,855

Cr Investment in Muninger stocks 9,185

Cr Gain on sale 1,670

Sept. 1 Received a $1 per share cash dividend on the Tatman common stock.

Dr Cash 700

Cr Dividend revenue 700

Oct. 1 Received the semiannual interest on the Yoakem bonds.

Dr Cash 1,260

Cr Interest revenue 1,260

Oct. 1 Sold the Yoakem bonds for $41,000.

Dr Cash 41,000

Dr Loss on sale 1,000

Cr Investment in Yoakem bonds 42,000

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.