Freema Company had no short-term investments prior to year 2011. It had the following transactions involving short-term

Question:

Freema 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 $29.75 per share plus a $440 brokerage fee.

May 1 Paid $125,000 to buy 90-day U.S. Treasury bills (debt securities): $125,000 principal amount, 4% interest, securities dated May 1.

July 7 Purchased 4,000 shares of PepsiCo stock at $47.75 per share plus a $410 brokerage fee.

20 Purchased 2,000 shares of Xerox stock at $19.75 per share plus a $490 brokerage fee.

Aug. 3 Received a check for principal and accrued interest on the U.S. Treasury bills that matured on July 29.

15 Received a $0.90 per share cash dividend on the Gem Co. stock.

28 Sold 4,000 shares of Gem Co. stock at $36.50 per share less a $250 brokerage fee.

Oct. 1 Received a $1.75 per share cash dividend on the PepsiCo shares.

Dec. 15 Received a $1.05 per share cash dividend on the remaining Gem Co. shares.

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 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

3. Explain the balance sheet presentation of the fair value adjustment for Freema’s short-term investments.

4. How do these short-term investments affect Freema’s

(a) Income statement for year 2011

(b) The equity section of its balance sheet at year-end 2011?

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