Question

In: Accounting

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2018. The company...

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2018. 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, 2017.

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 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.

Solutions

Expert Solution

ANS 1 JOURNAL ENTRIES

MAR 31 Investment in 8% dt corporation Dr. $400000

to cash $400000

SEP 1 Investment in AI bonds Dr. $900000

to cash $900000

SEP 30 cash Dr. $16000($400000*8%*6/12)

to investment revenue $16000

OCT 2 cash Dr. $425000

to investment in 8%dt corp $400000

to gain on sale of investment $25000

NOV 1 Investment in 6%Bond Dr. $1400000

to cash $1400000

DEC 31 Investment revenue receivable Dr.$ 30000

to investment receivable $30000

($900000*10%*4/12)

DEC 31 Fair value adjustment Dr. $10000

to net unrealized holding gain and losses$10000

COST FAIR VALUE

M&D $1400000 $1460000 $60000(UNREALISED GAIN)

AI $900000 $850000 $50000(UNREALISED LOSS)

$2300000 $2310000 $10000

INCOME STATEMENT

Investment Revenue ($16000+$30000) $46000

Gain on sale of investment $25000

STATEMENT OF COMPREHENSIVE INCOME

Net unrealized holding gain ($60000-$50000) $10000

BALANCE SHEET(EXTRACTS)

Current assets

Investment revenue receivable $30000

securities available for sale $2300000

+ fair value adjustment $10000

Shareholder's equity

net unrealised holding gain $10000


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