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.

Income statement: Interest revenueselected answer correct not attempted $60,000selected answer correct Gain on investmentsselected answer correct not attempted 35,000selected answer correct not attempted not attempted not attempted Net income $95,000 Statement of comprehensive income: Net incomeselected answer correct $95,000selected answer correct Other comprehensive incomeselected answer correct $0selected answer correct Comprehensive income $95,000 Balance sheet: Assets Current Assets Interest receivableselected answer correct not attempted $44,000selected answer correct Cashselected answer correct not attempted 2,256,000selected answer incorrect not attempted not attempted not attempted Investments Investment in bondsselected answer correct $2,300,000selected answer correct Add: Fair value adjustmentselected answer correct 10,000selected answer correct $2,310,000 Shareholders’ Equity Retained earningsselected answer correct $95,000selected answer correct

I need help with requirement 2 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

Part 1 :

2021

March 31 for Distribution Transformer bonds

Investment in bonds ...............................................   400,000
     Cash....................................................................   400,000

September 1 for American Instruments bonds

Investment in bonds ...............................................   900,000
     Cash....................................................................   900,000

September 30 for Distribution Transformer bonds

Cash........................................................................   16,000

  Interest revenue ($400,000 × 8% × 6/12) ...................   16,000

October 2 for Distribution Transformer bonds

1) Update the fair value adjustment for Distribution Transformer bonds

Need to move from a fair value adjustment of $0 to $25,000:

	Fair Value Adjustment
Balance on 3/31/2021	$ 0
± Adjustment needed to update fair value	?
Balance needed on 10/2/2021 ($425,000 – $400,000)	$25,000

Fair value adjustment............................................................   25,000

  Gain on investments (unrealized, NI) (to balance) ...............     25,000

Note: The gain included in NI equals the difference between the proceeds ($425,000) and the carrying value of the investment ($400,000).

2) Record the sale transaction for Distribution Transformer bonds

Cash (proceeds)......................................................... 425,000
     Investment in bonds (cost).................................... 400,000
     Fair value adjustment (account balance)..................   25,000

November 1 for M&D bonds

Investment in bonds ............................................... 1,400,000
Cash.................................................................... 1,400,000

December 31   

Adjusting entries:

Accrue interest for American Instruments bonds

Interest receivable...................................................   30,000
     Interest revenue ($900,000 × 10% × 4/12)..................   30,000

Accrue interest for M&D bonds

Interest receivable...................................................   14,000
     Interest revenue ($1,400,000 × 6% × 2/12)..................   14,000

Prepare fair value adjustment for remaining investments

Accumulated   

Unrealized

Trading Securities Investments   Cost Fair Value Gain (Loss)

M & D Corporation bonds $1,400,000 $1,460,000 $60,000

American Instruments bonds 900,000    850,000    (50,000)

Totals—Dec. 31, 2021 $2,300,000 $2,310,000 $10,000*

Need to move from a fair value adjustment of $0 to $10,000:

	Fair Value Adjustment
Balance on 1/1/2021	$ 0
± Adjustment needed to update fair value	?
Balance needed on 12/31/2021	$10,000

Fair value adjustment (calculated above).....................   10,000

Gain on investments (unrealized, NI) ................. 10,000

Part 2 :

Income statement:

Interest revenue ($16,000 + $30,000 + $14,000)     $ 60,000

Gain on investments ($25,000 + $10,000) 35,000

Net Income $ 95,000

Statement of comprehensive income:

Net income $95,000
Other comprehensive income    0

Comprehensive income $95,000

Balance sheet:

  Current Assets

Interest receivable $ 44,000

  Investment in bonds         $2,300,000

  Plus: Fair value adjustment    10,000 $2,310,000

  Shareholders’ Equity

Retained Earnings.......................................... $95,000