Question

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2018. 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 when circumstances warrant. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2017. Mar. 31 Acquired 6% Distribution Transformers Corporation bonds costing $430,000 at face value. Sep. 1 Acquired $945,000 of American Instruments’ 8% bonds at face value. Sep. 30 Received semiannual interest payment on the Distribution Transformers bonds. Oct. 2 Sold the Distribution Transformers bonds for $458,000. Nov. 1 Purchased $1,410,000 of M&D Corporation 4% bonds costing 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 $ 892,000 M&D Corporation bonds $ 1,493,000 (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. 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 2018 income statement, 2018 statement of comprehensive income, and 12/31/2018 balance sheet as a result of these investments.

Answer 1

Investment Activities of Ornamental Insulation Corporation During 2018
Mar. 31	Investment in Distribution Transformers Bonds @6%	430000
	Cash		430000
Sep. 1	Investment in American Instrument Bonds @8%	495000
	Cash		495000
Sep. 30	Cash	12900
	Investment Income		12900
Oct. 2	Cash	458000
	Investment in Distribution Transformers Bonds @6%		430000
	Gain on sale of investments		28000
Nov. 1	Investment in M&D Corporation Bonds @4%	1410000
	Cash		1410000
Dec. 31	Investment in American Instrument Bonds @8%	397000
	Investment in M&D Corporation Bonds @4%	83000
	Interest Receivable		480000