Question

Problem 12-7 Various transactions related to equity investments: fair value through net income [LO12-5]

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 to 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 $540,000.

Sep. 1 Acquired $1,110,000 of American Instruments' common stock.

Sep. 30 Received a $16,200 dividend on the Distribution Transformers common stock.

Oct. 2 Sold the Distribution Transformers common stock for $579,000.

Nov. 1 Purchased $1,560,000 of M&D Corporation common stock.

Dec. 31 Recorded any necessary adjusting entry(s) relating to the investments.

The market prices of the investments are: American Instruments common stock $ 1,046,000

M&D Corporation common stock $ 1,635,000

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.

Answer 1

Answer 1.
Journal Entry
Date	Particulars	Dr. Amt.	Cr. Amt.
31-Mar	Investment in DT Corporation	540,000.00
	Cash		540,000.00
	(record the common stock accquired of DT Corp.)
1-Sep	Investment in AI	1,110,000.00
	Cash		1,110,000.00
	(record the common stock accquired of AI)
30-Sep	Cash	16,200.00
	Investment Revenue		16,200.00
	(record the dividend received from DT Common Stock)
2-Oct	Cash	579,000.00
	Investment in DT Corporation		540,000.00
	Gain on sale of Investment		39,000.00
	(record the sale of DT Common Stock)
1-Nov	Investment in M&D Corp.	1,560,000.00
	Cash		1,560,000.00
	(record the common stock accquired of M&D Corp.)
		11,000.00
31-Dec	Fair Value Adjustments		11,000.00
	Net Unrealized Holding Gain & Losses - OCI
	(record the unrealized gain on investments)

	Cost	Fair Value	Difference
AI - Common Stock	1,110,000.00	1,046,000.00	(64,000.00)
M& D - Common Stock	1,560,000.00	1,635,000.00	75,000.00
Total	2,670,000.00	2,681,000.00	11,000.00
Answer 2.
Income Statement
Investment Revenue	16,200.00
Gain on Sale of Investment	39,000.00	55,200.00
Statement of Comprehensive Income
Net Unrealized Holding Gains	11,000.00
Balance Sheet
Assets
Current Assets
Securities Available for Sale	2,670,000.00
Add: Fair Value Adjustments	11,000.00	2,681,000.00
Shareholders' Equity
Net Unrealized Holding Gains		11,000.00