SP Systems had no short-term investments prior to 2011. It had the following transactions involving short-term investments in available-for-sale securities during 2011.
Feb. 6 Purchased 6,000 shares of Nokia stock at $24.75 per share plus a $400 brokerage fee.
15 Paid $250,000 to buy six-month U.S. Treasury bills (debt securities): $250,000 principal amount, 4% interest, securities dated February 15.
Apr. 7 Purchased 3,000 shares of Dell Co. stock at $49.25 per share plus a $370 brokerage fee.
June 2 Purchased 1,500 shares of Merck stock at $18.25 per share plus a $450 brokerage fee.
30 Received a $0.19 per share cash dividend on the Nokia shares.
Aug. 11 Sold 1,500 shares of Nokia stock at $29.50 per share less a $490 brokerage fee.
16 Received a check for principal and accrued interest on the U.S. Treasury bills purchased February 15.
24 Received a $0.16 per share cash dividend on the Dell shares.
Nov. 9 Received a $0.20 per share cash dividend on the remaining Nokia shares.
Dec. 18 Received a $0.21 per share cash dividend on the Dell 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 the short-term investments in available-for-sale securities. The year-end fair values per share are: Nokia, $23.50; Dell, $55.50; and Merck, $15.25.
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.
Analysis Component
4. Explain the balance sheet presentation of the fair value adjustment to SP’s short-term investments.
5. How do these short-term investments affect (a) its income statement for year 2011 and (b) the equity section of its balance sheet at the 2011 year-end?