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 $570,000 at face value. Sep. 1 Acquired $1,155,000 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 $612,000. Nov. 1 Purchased $1,570,000 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 $ 1,088,000 M&D Corporation bonds $ 1,649,000 (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

Date	Account titles and explanation	Debit	Credit
Mar 31, 2018	Investment in Distribution Transformers Bonds	$570000
	Cash		$570000
	(To record bonds purchased)
Sep 1, 2018	Investment in American Instruments' Bonds	$1155000
	Cash		$1155000
	(To record bonds purchased)
Sep 30, 2018	Cash (570000*8%*6/12)	$22800
	Interest revenue		$22800
	(To record interest received)
Oct 2, 2018	Fair value adjustment (612000-570000)	$42000
	Unrealized holding gain- OCI		$42000
	(To record unrealized gain)
Oct 2, 2018	Reclassification adjustment- OCI	$42000
	Fair value adjustment		$42000
Oct 2, 2018	Cash	$612000
	Gain on sale of investment		$42000
	Investment in Distribution Transformers Bonds		$570000
	(To record investment on sale)
Nov 1, 2018	Investment in M&D Corporation bonds	$1570000
	Cash		$1570000
	(To record bonds purchased)
Dec 31, 2018	Interest receivable (1155000*10%*4/12)	$38500
	Interest revenue		$38500
	(To record interest)
Dec 31, 2018	Interest receivable (1570000*6%*2/12)	$15700
	Interest revenue		$15700
	(To record interest)
Dec 31	Fair value adjustment (1155000+1570000-1088000-1649000)	$12000
	Unrealized holding gain- OCI		$12000
	(To record unrealized gain)

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.

Income Statement:
Interest revenue (22800+38500+15700)		$77000
Gain on sale of investment		42000
		$119000
Statement of Comprehensive Income:
Net income		$119000
Other comprehensive income:
Reclassification adjustment	$(42000)
Unrealized holding gain (12000+42000)	54000	12000
Comprehensive Income		$131000
Balance Sheet
Assets
Current assets
Interest receivable (38500+15700)		54200
Investments
Securities available for sale (1155000+1570000)	2725000
Add: Fair value adjustment	12000	2737000
Shareholders' Equity
Retained Earnings		119000
Accumulated other comprehensive income
Accumulated unrealized holding gain		$12000