Question

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021. 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 in years when circumstances warrant. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2020. Mar. 31 Acquired 7% Distribution Transformers Corporation bonds costing $520,000 at face value. Sep. 1 Acquired $1,080,000 of American Instruments’ 9% bonds at face value. Sep. 30 Received semiannual interest payment on the Distribution Transformers bonds. Oct. 2 Sold the Distribution Transformers bonds for $557,000. Nov. 1 Purchased $1,560,000 of M&D Corporation 5% 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 $ 1,018,000 M&D Corporation bonds $ 1,640,000 (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. 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 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. a) Record the acquisition of 7% Distribution Transformers Corporation bonds costing $520,000 at face value. b)Record the acquisition of $1,080,000 of American Instruments’ 9% bonds at face value. c)Record the entry for the semiannual interest received on the Distribution Transformers bonds. d)Record the entry to adjust to fair value on the date of sale of the Distribution Transformers bonds. e)Record the entry for the reclassification adjustment on the date of sale. f)Record the entry for sale of Distribution Transformers bonds for $557,000. g)Record the acquisition of $1,560,000 of M&D Corporation 5% bonds at face value H) Record the interest accrual for American Instruments bonds. I)Record the interest accrual for M&D bonds. J)Record the entry to adjust fair value of the investments at year-end

Answer 1

No.	Date	Account titles and explanation	Debit	Credit
a)	Mar 31, 2021	Investment in Distribution Transformers Bonds	$520000
		Cash		$520000
		(To record acquisition of 7% Distribution Transformers Corporation bonds)
b)	Sep 1, 2021	Investment in American Instruments' Bonds	$1080000
		Cash		$1080000
		(To record acquisition of American Instruments’ 9% bonds)
c)	Sep 30, 2021	Cash ($520000*7%*6/12)	$18200
		Interest revenue		$18200
		(To record semiannual interest received on the Distribution Transformers bonds)
d)	Oct 2, 2021	Fair value adjustment (557000-520000)	$37000
		Unrealized holding gain- OCI		$37000
		(To record adjust to fair value on the date of sale of the Distribution Transformers bonds)
e)	Oct 2, 2021	Reclassification adjustment- OCI	$37000
		Fair value adjustment		$37000
		(To record reclassification adjustment on the date of sale)
f)	Oct 2, 2021	Cash	$557000
		Gain on sale of investment		$37000
		Investment in Distribution Transformers Bonds		$520000
		(To record sale of Distribution Transformers bonds)
g)	Nov 1, 2021	Investment in M&D Corporation bonds	$1560000
		Cash		$1560000
		(To record acquisition of M&D Corporation 5% bonds)
h)	Dec 31, 2021	Interest receivable (1080000*9%*4/12)	$32400
		Interest revenue		$32400
		(To record interest accrual for American Instruments bonds)
i)	Dec 31, 2021	Interest receivable (1560000*5%*2/12)	$13000
		Interest revenue		$13000
		(To record interest accrual for M&D bonds)
j)	Dec 31, 2021	Fair value adjustment ($1018000+1640000-1080000-1560000)	$18000
		Unrealized holding gain- OCI		$18000
		(To record fair value of the investments)

2)

Income Statement:
Interest revenue (18200+32400+13000)		$63600
Gain on sale of investment		37000
Net income		$100600
Statement of Comprehensive Income:
Net income		$100600
Other comprehensive income:
Reclassification adjustment	(37000)
Unrealized holding gain (37000+18000)	55000	18000
Comprehensive Income		$118600
Balance Sheet:
Assets
Current assets:
Cash (18200+557000-520000-1080000-1560000)		(2584800)
Interest receivable (32400+13000)		45400
Investments:
Securities available for sale (1080000+1560000)	2640000
Add: Fair value adjustment	18000	2658000
Shareholders' Equity:
Retained Earnings		$100600
Accumulated other comprehensive income
Accumulated unrealized holding gain		18000