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 $550,000 at face value.

Sep. 1 Acquired $1,350,000 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 $595,000.

Nov. 1 Purchased $2,150,000 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 $ 1,305,000 M&D Corporation bonds $ 2,225,000 (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

March 31 Investment 8% Distributor Transformer Corp. A/c dr. $ 550000

To Cash A/c $ 550000

( Being investment made)

Sept 1 Investment 10% American Instruments. A/c dr. $ 1350000

To Cash A/c $ 1350000

( Being investment made)

Sept 30 Cash A/c dr. $22000

To Interest A/c  $22000

( Being Interest Earned)

Oct 2 Cash A/c dr. $ 595000

To 8% Distributor Transformer Corp. A/c $ 550000

To Gain on sale of Investment A/c $45000

( Being Investment Sold )

Nov 1 Investment in 6% M&D Corp A/c Dr $2150000

To Cash A/c   $2150000

( Being Investment made )

Dec 31 Interest receivable A/c dr. $45000

To Interest A/c  $45000

( Being Interest Accrued)

Dec 31 Interest receivable A/c dr. $21500

To Interest A/c  $21500

( Being Interest Accrued)

Dec 31 Fair Value Adjustment A/c Dr. $ 30000

To Unrealised Holding Gain A/c $ 30000

( Being Fair value adjusted on dec 31 )

INCOME STATEMENT

Revenue From Investment $ 88500

Gain On sale of Inv $ 45000

Net Income $ 133500

Statement Of Comprehensive Income

Unrealised Holding Gain $ 30000

Currents Assets

Interest Receivable $ 66500

Investments (Total) $ 3530000

Shareholders Equity

Unrealised Holding Gain $ 30000