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Equity Securities Entries and Disclosures

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Parrot Company has the following securities in its investment portfolio on December 31, 2010 (all securities were purchased in 2010):

3,000 shares of Ames Co. common stock which cost $58,500
10,000 shares of Master Ltd. common stock which cost $580,000
6,000 shares of Kong Company preferred stock which cost $255,000
The Securities Fair Value Adjustment account shows a credit of $10,100 at the end
of 2010.
In 2011, Parrot completed the following securities transactions.
1. On January 15, sold 3,000 shares of Ames's common stock at $22
per share less fees of $2,150
2. On April 17, purchased 1,000 shares of Cast's common stock at $33.50
per share plus fees of $1,980
On December 31, 2011, the market values per share of these securities were:
Master Ltd. $61.00
Kong Co. $40.00
Cast Co. $29.00
In addition, the accounting supervisor of Parrot told you that, even though all these securities have readily determinable fair values, Parrot will not actively trade these securities because the top management intends to hold them for more than one year.

(a) Prepare the entry for the security sale on January 15, 2011.

Gross selling price of 3,000 shares at $23 $66,000
Less: Commissions, taxes, and fees Amount
Text Title Formula
Text Title Amount
Gain on sale of stock Formula

Jan 15, 11 Cash Formula
Account Title Amount
Account Title Amount

(b) Prepare the journal entry to record the security purchase on April 17, 2011.

Total purchase price is:
Number of shares 1,000
Cost per share Amount
Text title Formula
Text title Amount
Text title Formula

Apr 17, 11 Available-for-Sale Securities Amount
Account Title Amount

"(c) Compute the unrealized gains or losses and prepare the adjusting entry for Parrot on
December 31, 2011."

Available-for-Sale Portfolioâ?"December 31, 2011
Securities Cost "Fair
Value" "Unrealized
Master Ltd. $580,000 Amount Formula
Kong Co. Amount Amount Formula
Cast Co. Amount Amount Formula
Total of portfolio Formula Formula Formula
Previous securities fair value adjustment balanceâ?"Cr. Amount
Securities fair value adjustmentâ?"Dr. Formula

Dec 31, 11 Securities Fair Value Adjustment (Available-for-Sale) Amount
Account Title Amount

(d) How should the unrealized gains or losses be reported on Parrot's balance sheet?

Enter text answer as appropriate.

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Solution Summary

The solution prepares Equity Securities Entries and Disclosures.

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Prepare journal entries to record transactions, a table to compare year-end costs and fair values, and adjusting entries for short-term investments in 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.

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?

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