In: Accounting
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.
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