Question

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2018. The company buys debt securities, not intending to profit from short-term differences in price and not necessarily to hold debt securities to maturity, but to have them available for sale when circumstances warrant. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2017.

Mar.		31		Acquired 8% Distribution Transformers Corporation bonds costing $550,000 at face value.
Sep.		1		Acquired $1,125,000 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 $590,000.
Nov.		1		Purchased $1,550,000 of M&D Corporation 6% bonds costing 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	$	1,060,000
M&D Corporation bonds	$	1,625,000

(Hint: Interest must be accrued.)

Required:
1. Prepare the appropriate journal entry for each transaction or event during 2018, as well as any adjusting entries necessary at year end. For any sales, prepare entries to update the fair-value adjustment, record any reclassification adjustment, and record the sale.
2. Indicate any amounts that Ornamental Insulation would report in its 2018 income statement, 2018 statement of comprehensive income, and 12/31/2018 balance sheet as a result of these investments.

Answer 1

1

Date	Account	Debit	Credit
Mar.31	Investment in Distribution transformers	550,000
	Cash		550,000
Sep.1	Investment in American instuments	1,125,000
	Cash		1,125,000
Sep.30	Cash	22,000
	Interest revenue		22,000
Oct.2	Cash	590,000
	Realized gain on sale of available for securities		40,000
	Investment in Distribution transformers		550,000
Nov.1	Investment in M&D bonds	1,550,000
	Cash		1,550,000
Dec.31	Unrealized loss on American instruments	65,000
	Investment in American instuments		65,000
Dec.31	Investment in M&D bonds	75,000
	Unrealized gain on M&D bonds		75,000

2

Income statement = 22,000 + 40,000 = 62,000

Other comprehensive income = 75,000 - 65,000 = 10,000 gain

Statement of comprehensive income = 62,000 + 10,000= 72,000

Balance sheet = 1,060,000 + 1,625,000 = 2,685,000