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 $570,000 at face value.

Sep. 1 Acquired $1,410,000 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 $625,000.

Nov. 1 Purchased $2,250,000 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 $ 1,367,000 M&D Corporation bonds $ 2,327,000 (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) Journal Entries ;-

Date	Particulars	Debit($)	Credit($)
Mar 31	Investment in Corporation DT shares A/c Dr.	570000
	To Cash A/c		570000
Sep. 1	Investment in American Instruments Bonds A/c Dr.	1410000
	To Cash A/c		1410000
Oct. 2	Cash A/c Dr.	625000
	To Investment in Corporation DT Share A/c		570000
	To Gain on Sale of Investments ($625000-$570000)		55000
Nov. 1	Investment in M&D Crop. Bonds A/c Dr.	2250000
	To Cash A/c		2250000
Dec.31	Investment Revenue Receivable A/c Dr.	47000
	To Investment Revenue A/c ($1410000*10%*(4/12))		47000
Dec. 31	Fair Value Adjustment A/c Dr. (From working Note)	37000
	To Net Unrealized Holding Gains and Losses A/c		37000

Journal entries for Dividend :-

Date	Particulars	Debit($)	Credit($)
	Cash A/c Dr. ($570000*8%*(3/12))	11400
	To Investment Income A/c		11400

Working Note :-

Net Unrealized holding gain/(loss) as on Dec. 31, 2018.

Security	(Fair Value - Amortized Cost)	Fair Value Adjustment
Corp. M&D Bonds	($2327000-$2250000)	$77000
American Instruments Bonds	($1367000-$1410000)	($43000)
Total	($3694000-$3660000)	$34000
Existing Balance in Fair Value Adjustment		-
Increase/(Decrease) needed in fair value adjustment		$34000

2) Income Statement :-

Particulars	Amount($)
Investment Revenue :-
Dividend Income	11400
Interest Income	47000
Gain on sale of Investments	55000
Total Operating Income	113400

Statement of Comprehensive Income :-

Statement of Comprehensive Income	Amount($)
Other Comprehensive Income/(Loss) Items:-
Net Unrealized holding gains and losses on investments	34000

Balance Sheet ;-

Particulars	Amount($)	Amount($)
Current Assets :-
Investment Revenue Receivable		47000
Securities Available for sale	3660000
Add : Fair Value Adjustment	34000	3694000
Shareholders Equity :-
Accumulated other comprehensive Income
Net Unrealized Holding gains and Losses		34000