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 $510,000 at face value.
Sep.		1		Acquired $1,230,000 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 $1,950,000 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	$	1,181,000
M&D Corporation bonds	$	2,021,000

(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

1) Journal entries for each transaction or event during 2021, as well as any adjusting entries necessary at year end:

Date	Particulars	Debit ($)	Credit ($)
Mar 31	Investment in Corporation bonds a/c	510,000
	To Cash		510,000
	(Recording acquisition of 8% Distribution Transformers Corporation bonds)
Sep 1	Investment in American instruments a/c	1,230,000
	To Cash		1,230,000
	(Recording acquisition of 10% American Instruments bonds)
Sep 30	Cash a/c	20,400
	To Interest (510000*8/100*6/12)		20,400
	Recording semiannual interest payment on the 8% Distribution Transformers bonds.
Oct 2	cash a/c	590,000
	To Investment in Corporation bonds a/c		510,000
	Fair value adustment a/c		80,000
	(Recording sale of Investment in Corporation bonds)
Oct 2	Fair value adustment a/c	80,000
	To Unrealized gain a/c		80,000
Nov 1	Investment in M & D Corporation bonds	1,950,000
	To cash		1,950,000
	(Recording acquisition of 6% M & DCorporation bonds)
Dec 31	Interest Receivable a/c	41,000
	To interest (1,230,000*4/12*10/100)		41,000
	(Interest accured on 10% American Instruments bonds)
Dec 31	Interest Receivable a/c	32,500
	To interest (1,950,000*2/12*10/100)		32,500
	(Interest accured on 6% M & DCorporation bonds)
Dec 31	Fair value adustment a/c	22,000
	To Unrealized gain a/c		22,000
	on 10% American Instruments bonds & )(1,181,000-1,230,000 = -49000 on 6% M & DCorporation bonds =2,021,000 - 1,950,000 = 71000 Net = 22,000 gain

2)

Net Income in Income statement

Particulars	Calculation	Amount ($)
Interest revenue	20,400 + 41000 + 32,500	93,900
Add: Unrealized gain	80,000+22,000	102,000
Net Income		195,900

Statement of OCI

Partuclars	Amount($)
Net Income	195,900
OC

Balance sheet extract

Particulars	Amount ($)
Interest accured (41,000+32,500)	75,300
Securities (1,230,000+1,950,000 = 3,180,000)
Add: Unrecognised Gain 22000	3,202,000
Share holders equity:
Retained earnings	195,900

if any doubt please mention in comment