Question

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 $440,000 at face value.

Sep. 1 Acquired $1,020,000 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 $485,000.

Nov. 1 Purchased $1,600,000 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 $ 974,000

M&D Corporation bonds $ 1,664,000

(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.

Answer 1

(1). Joural Entries;

Date	Accounts Titles & Explanation	Debit	Credit
Mar. 31	Investment in Distribution Transformers Corporation bonds	$440000
	Cash		$440000
	(For recording purchase of bonds of Distribution Transformers Corporation)
Sep. 1	Investment in American Instruments bonds	$1020000
	Cash		$1020000
	(For recording purchase of bonds of American Instruments)
Sep. 30	Cash	$17600
	Investment revenue		$17600
	(For recording interest revenue on bonds of Distribution Transformers Corporation)
Oct. 2	Cash	$485000
	Investment in Distribution Transformers      Corporation bonds		$440000
	Gain n sale of investments		$45000
	(For recording sale of bonds of Distribution Transformers)
Nov. 1	Investment in M&D Corporation bonds	$1600000
	Cash		$1600000
	(For recording purchase of bonds of M&D Corporation)
Dec. 31	Investment revenue receivable	$34000
	Investment revenue		$34000
	(For recording accrued interest on bonds of American Instruments)
Dec. 31	Investment revenue receivable	$16000
	Investment revenue		$16000
	(For recording accrued interest on bonds of M&D Corporation)
Dec. 31	Fair value adjustment	$18000
	Net unrealized holding gains and losses –      OCI		$18000
	(For recording effect of fair value adjustment)

Working Note:

1. Accrued interest on bonds of American Instruments =

($1020000 * 0.10 * 4) 12 = $34000

2. Accrued interest on bonds of M&D Corporation =

($1600000 * 0.06 * 2) 12 = $16000

3. Unrealized holding gains and losses will be calculated as follow;

For American Instruments bonds ($1020000 – $974000) = $46000 Unrealized holding loss

For M&D Corporation bonds ($1600000 – $1664000) = $64000 Unrealized holding gain

Thus net Unrealized holding gains ($64000 – $46000) = $18000

(2).

Reporting in its 2018 income statement;

Investment revenue ($34000 + $16000 + $17600) = $67600

Gain on sale of investments = $45000

Reporting in its 2018 statement of comprehensive income;

Net unrealized holding gains = $18000

Reporting in its 2018 Balance Sheet;

Current Assets;

Investment revenue receivable ($34000 + $16000) = $50000

Securities available-for-sale…………………..$2620000

+ Fair value adjustment………………………..$18000

Total Securities available-for-sale…………….$2638000

Shareholders’ Equity:

Net unrealized holding gains = $18000