In: Accounting
The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2018. The company buys equity securities as investments. None of Ornamental's investments are large enough the exert significant influence on the investee. Ornamental's fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2017.
Mar 31 - Acquired Distribution Transformers Corporation common stock for $400,000.
Sep 1 - Acquired $900,000 of American Instruments' common stock.
Sep 30 - Received a $16,000 dividend in the Distribution Transformers common stock.
Oct 2 - Sold the Distribution Transformers common stock for $425,000.
Nov 1 - Purchased $1,400,000 of M&D Corporation common stock.
Dec 31 - Recorded any necessary adjusting entry(s) relating to investments. The market prices of the investments are: American Intruments common stock - $850,000; M&D Corporation common stock - $1,460,000
Required:
1. Prepare the appropriate journal entry for each transaction or event during 2018, as well as any adjusting entries necessary at year end.
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.
As it is indicated that the company purchases equity securities as investments, they should be treated as available for sale securities. Also, since the investments are not large enough for exerting significant influence in the investee companies, the cost method is employed for accounting for transactions pertaining to these investments.
1. In the books of Ornamental Insulation Company:
Date | Account Titles | Debit | Credit |
2018 | $ | $ | |
Mar 31 | Investment in AFS securities | 400,000 | |
Cash | 400,000 | ||
Sep 1 | Investment in AFS securities | 900,000 | |
Cash | 900,000 | ||
Sep 30 | Cash | 16,000 | |
Dividend Revenue | 16,000 | ||
Oct 2 | Cash | 425,000 | |
Investment in AFS securities | 400,000 | ||
Gain on sale of investments | 25,000 | ||
Nov 1 | Investment in AFS securities | 1,400,000 | |
Cash | 1,400,000 | ||
Dec 31 | Fair Value Adjustment | 10,000 | |
Unrealized holding gain on AFS investments | 10,000 |
2. $ 16,000 should be reported as dividend revenue on the Income Statement for 2018. Also, gain on sale of investments would also be reported as such in the Income Statement.
However, any unrealized gains/losses on AFS securities should be reported in the Statement of Comprehensive Income.
In the balance sheet, the investments would be carried at fair market value of $ 2,310,000 as short term investments in the current assets section on the assets side. The net unrealized gain of $ 10,000 should be reported as comprehensive income as part of the stockholders' equity section in the balance sheet.