Question

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021. The company buys debt securities, intending to profit from short-term differences in price and maintaining them in an active trading portfolio. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2020.

Mar. 31 Acquired 8% Distribution Transformers Corporation bonds costing $400,000 at face value.
Sep. 1 Acquired $900,000 of American Instruments’ 10% bonds at face value.
Sep. 30 Received semiannual interest payment on the Distribution Transformers bonds.
Oct. 2 Sold the Distribution Transformers bonds for $425,000.
Nov. 1 Purchased $1,400,000 of M&D Corporation 6% bonds at face value.
Dec. 31 Recorded any necessary adjusting entry(s) relating to the investments.

The market prices of the investments are
American Instruments bonds $ 850,000
M&D Corporation bonds $ 1,460,000 (Hint: Interest must be accrued.)

Required:
1. Prepare the appropriate journal entry for each transaction or event during 2021, as well as any adjusting entries necessary at year end.
2. Indicate any amounts that Ornamental Insulation would report in its 2021 income statement, 2021 statement of comprehensive income, and 12/31/2021 balance sheet as a result of these investments. Include totals for net income, comprehensive income, and retained earnings as a result of these investments.

Answer 1

Answer and Explanation:

a)

Journal entries

Mar.31

Dr Investment in Distribution Transformers shares $ 400,000.00

Cr Cash $ 400,000.00

Sept.1

Dr Investment in American Instruments bonds $900,000.00

Cr Cash $900,000.00

Sept.30

Dr Cash ($400,000 x 8%/2) $ 16,200.00

Cr Investment revenue $ 16, 000.00

Oct.2

Dr Cash $ 425,000.00

Cr Investment in Distribution Transformers $ 400,000.00

Cr Gain on sale of investments $ 25,000.00

Nov.1

Dr Investment in M&D Corporation shares $1,400,000.00

Cr Cash $1,400,000.00

Dec.31

Dr Investment revenue receivable $ 30,000.00

Cr Investment revenue ($900,000 x 10% x 4/12) $ 30,000.00

Dec.31

Dr Investment revenue receivable $ 14,000.00

Cr Investment revenue ($1,400,000x 6% x 2/12) $ 14,000.00

Dec.31

Dr Fair value adjustment (calculated below) $ 10,000.00

Cr Net unrealized holding gains and losses–OCI $ 10,000.00

Available for sale securities Cost Fair market Value Profit/Loss

M & D Corporation shares

$1,400,000.00 $ 1,460,000.00 $ 60,000.00

American Instruments bonds $900,000.00 $850,000.00 ($50,000.00)

Totals $2,300,000.00 $2,310,000.00 $ 10,000.00

b)

Income Statement

Investment Revenue = $16,200 + $30,000 + 14,000 $ 60,200.00

Gain on sale of investments $ 25,000.00

Statement of comprehensive income

Net unrealized holding gains and losses on investments $ 10,000.00

Balance sheet:

Current Assets

Investment revenue receivable $ 30,000.00

Securities available-for-sale $2,300,000.00

Add: Fair value adjustment $ 10,000.00 $2,310,000.00

Shareholders’ Equity

Net unrealized holding gains and losses on investments $ 10,000.00

Answer 2

Part 1 :

    Journal entries for Ornamental Insulation Corporation during 2021.

Date                  Entries                                      Dr.                          Cr.

Mar.31     Investment in Distribution

              Transformers shares                   $ 400,000.00

                        Cash                                                               $ 400,000.00

Sept.1              Investment in

             American Instruments bonds          $900,000.00

                        Cash                                                                   $900,000.00

Sept.30     Cash ($400,000 x 8%/2)                  $ 16,200.00  

                Investment revenue                                                  $ 16, 000.00

Oct.2         Cash                                                  $ 425,000.00

                   Investment in

             Distribution Transformers                                             $ 400,000.00

              Gain on sale of investments                                          $ 25,000.00

Nov.1       Investment in

            M&D Corporation shares                        $1,400,000.00

                  Cash                                                                           $1,400,000.00

Dec.31         Investment revenue receivable        $ 30,000.00

                    Investment revenue

               ( $900,000 x 10% x 4/12)                                                $ 30,000.00

Dec.31  Investment revenue receivable                   $ 14,000.00

            Investment revenue

          ($1,400,000x 6% x 2/12)                                                      $ 14,000.00

Dec.31      Fair value adjustment                                   $ 10,000.00

             Net unrealized holding

              gains and losses–OCI                                                     $ 10,000.00

Working Notes :

Available for sale securities Cost Fair market Value Profit/Loss=

• M & D Corporation shares  ($1,400,000.00 $ 1,460,000.00 $ 60,000.00)

• American Instruments bonds ($900,000.00 $850,000.00 ($50,000.00))

         Totals   = ( $2,300,000.00 $2,310,000.00 $ 10,000.00)

Part 2 :

                Ornamental Insulation  Income Statement

Investment Revenue = $16,200 + $30,000 + 14,000 $ 60,200.00

Gain on sale of investments= $ 25,000.00

                  Statement of comprehensive income

Net unrealized holding gains and losses on investments $ 10,000.00

Balance sheet:

Current Assets

Investment revenue receivable $ 30,000.00

Securities available-for-sale $2,300,000.00

Add: Fair value adjustment $ 10,000.00 $2,310,000.00

Shareholders’ Equity

Net unrealized holding gains and losses on investments $ 10,000.00.

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