Malam Christmas Tree Company’s business—the growing and selling of Christmas trees—is seasonal. By January 1, its heavy selling season is over, and it has cash on hand that will not be needed for several months. It has minimal expenses from January to October and heavy expenses during the harvest and shipping months of November and December. The company believes in investing idle cash in marketable securities, which can be sold when funds are needed for operations. Its fiscal year ends on June 30.
On January 10 of the current year, Malam has cash of $597,300 on hand. It keeps $20,000 on hand for operating expenses and invests the rest as follows:
$100,000 three-month Treasury bills ........... $ 97,800
5,000 shares of Ford Motor Co. ($10 per share) ...... 50,000
5,000 shares of McDonald’s ($25 per share) ........ 125,000
4,350 shares of IBM ($70 per share) ........... 304,500
Total short-term investments .............. $577,300
On February 10 and May 10, Malam receives quarterly cash dividends from each company in which it has invested: $0.10 per share from Ford Motor Co., $0.14 per share from McDonald’s, and $0.20 per share from IBM. It redeems the Treasury bills at face value on April 10. On June 1, it sells 1,000 shares of McDonald’s at $28 per share.
On June 30, the market values of the investments are as follows:
Ford Motor Co. ........ $11 per share
McDonald’s ......... $23 per share
IBM ............ $65 per share
Malam receives another quarterly dividend from each company on August 10. It sells all its remaining shares on November 1 at the following prices:
Ford Motor Co. ......... $ 9 per share
McDonald’s ......... $22 per share
IBM ............ $80 per share
1. Record the investment transactions that occurred on January 10, February 10, April 10, May 10, and June 1. The Treasury bills are accounted for as held-to-maturity securities, and the stocks are trading securities. Prepare the required adjusting entry on June 30 and record the investment transactions on August 10 and November 1.
2. Explain how the short-term investments would be shown on the balance sheet on June 30.
3. After November 1, what is the balance of Allowance to Adjust Short-Term Investments to Market, and what will happen to this account next June?
4. What is your assessment of Malam’s strategy with regard to idle cash?

  • CreatedSeptember 10, 2014
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