Incognito Company has the following securities in its investment portfolio on December 31, 2007 (all securities were purchased in 2007): (1) 3,000 shares of Green Day Co. common stock which cost $58,500, (2) 10,000 shares of David Sanborn Ltd. common stock which cost $580,000, and (3) 6,000 shares of Abba Company preferred stock which cost $255,000. The Securities Fair Value Adjustment account shows a credit of $10,100 at the end of 2007.
In 2008, Incognito completed the following securities transactions.
1. On January 15, sold 3,000 shares of Green Day’s common stock at $23 per share less fees of $2,150.
2. On April 17, purchased 1,000 shares of Tractors’ common stock at $31.50 per share plus fees of $1,980. On December 31, 2008, the market values per share of these securities were: Green Day $20, Sanborn $62, Abba $40, and Tractors $29. In addition, the accounting supervisor of Incognito told you that, even though all these securities have readily determinable fair values, Incognito will not actively trade these securities because the top management intends to hold them for more than one year.
Instructions
(a) Prepare the entry for the security sale on January 15, 2008.
(b) Prepare the journal entry to record the security purchase on April 17, 2008.
(c) Compute the unrealized gains or losses and prepare the adjusting entry for Incognito on December 31, 2008.
(d) How should the unrealized gains or losses be reported on Incognito’s balance sheet?