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Short-term Available-for-Sale Securities

See attached MS Word document titled Ethan Company Problem.

Perry Company had no short-term investments prior to year 2011. It had the following transactions involving short-term investments in available-for-sale securities during 2011.

Apr. 16 Purchased 8,000 shares of Gem Co. stock at $24.25 per share plus a 360 brokerage fee.
May 1 Paid $200,000 to buy 90-day U.S. Treasury bill (debt securities); $200,000 principle amount, 6% interest, securities dated May 1.
July 7 Purchased 4,000 shares of PepsiCo stock at $49.25 per share plus a $350 brokerage fee.
July 20 Purchased 2.000 shares of Xerox stock at $16.75 per share plus a $410 brokerage fee.
Aug. 3 Received a check for principal and accrued interest on the U.S. Treasury bill that matured on July 29.
Aug. 15 Received an $0.85 per share cash dividend on the Gem Co. stock.
Aug. 28 Sold 4,000 shares of Gem Co. stock at $30 per share less a $450 brokerage fee.
Oct. 1 Received $1.90 per share cash dividend on the PepsiCo shares.
Dec. 15 Received a $1.05 per share cash dividend on the remaining Gem Co shares.
Dec. 31 Received a $1.30 per share cash dividend on the PepsiCo shares.

Required
1. Prepare journal entries to record the preceding transactions and events.
2. Prepare a table to compare the year-end cost and fair values of Perry's short-term investments in available-for-sale securities. The year-end fair values per share are: Gem Co., $26.50; PepsiCo, $46.50; and Xerox, $13.75.
3. Prepare an adjusting entry, if necessary, to record the year-end fair value adjustment for the portfolio of short-term investments in available-for-sale securities.
4. Explain the balance sheet presentation of the fair value adjustment for Perry's short-term investments.
5. How do these short-term investments affect Perry's (a) income statement for year 2011 and (b) the equity section of its balance sheet at year-end 2011?

Attachments

Solution Preview

See the attached MS Word document titled Perry Company Solution for formatted copy.

Available-for-sale securities are debt and equity securities not classified as trading or held-to-maturity securities. These securities are purchased to yield interest, dividends, or increases in fair value. They are not actively managed like trading securities. If the intent is to sell the securities within the longer of one year or operating cycle, they are classified as short-term investments.

As with trading securities, companies adjust the cost of the portfolio of available-for-sale securities to reflect changes in fair value. This is done with a fair value adjustment to its total portfolio cost. However, any unrealized gain or loss for the portfolio of these securities is not reported on the income statement. Instead, it is reported in the equity section of the balance sheet.

When individual available-for-sale securities are sold, the difference between the cost of the individual securities sold and the net proceeds (sale price less fees) is recognized as a gain or ...

Solution Summary

This solution is comprised of a Financial Accounting problem that deals with transactions involving short-term investments in available-for-sale securities.
Shows how to journalize transactions.
Shows how to calculate unrealized gain or loss on equity.
Shows how to journalize an adjusting entry to record the year-end fair value adjustment.
Explains the balance sheet presentation of the fair value adjustment.
Explains how the short-term investments affect the income statement and the equity section of the balance sheet.

The problem shown here is taken from Fundamental Accounting Principles, McGraw-Hill, 20th ed., however, the detail step-by-step explanation of the topic provides students with a clear understanding of the concepts. Thank you for using BrainMass.com. Have a great day!

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