In: Accounting
The following selected transactions relate to investment
activities of Ornamental Insulation Corporation during 2021. 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 in
years when circumstances warrant. Ornamental’s fiscal year ends on
December 31. No investments were held by Ornamental on December 31,
2020.
Mar. | 31 | Acquired 5% Distribution Transformers Corporation bonds costing $600,000 at face value. | ||
Sep. | 1 | Acquired $1,200,000 of American Instruments’ 7% bonds at face value. | ||
Sep. | 30 | Received semiannual interest payment on the Distribution Transformers bonds. | ||
Oct. | 2 | Sold the Distribution Transformers bonds for $645,000. | ||
Nov. | 1 | Purchased $1,600,000 of M&D Corporation 3% 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 | $ | 1,130,000 | |
M&D Corporation bonds | $ | 1,680,000 | |
(Hint: Interest must be accrued.)
Required:
1. Prepare the appropriate journal entry for each
transaction or event during 2021, 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 2021 income statement, 2021 statement of
comprehensive income, and 12/31/2021 balance sheet as a result of
these investments. Include totals for net income, comprehensive
income, and retained earnings as a result of these investments.
Journal entry worksheet
Note: Enter debits before credits.
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1)
Journal Entries in the books of Ornamental Insulation Corporation | Amount ($) | |||
Date | Particulars | Debit | Credit | |
31-Mar-20 | Investment in Bonds A/c .. Dr | 600,000 | ||
To Bank/ Cash A/c | 600,000 | |||
Being acquired 5% Distribution Transformers Corporation bonds at face value | ||||
1-Sep-20 | Investment in Bonds A/c .. Dr | 1,200,000 | ||
To Bank/ Cash A/c | 1,200,000 | |||
Being acquired American Instruments’ 7% bonds at face value | ||||
30-Sep-20 | Bank / Cash A/c .. Dr | 600000*5%*6/12 | 15,000 | |
To Interest Revenue A/c | 15,000 | |||
Being Interest Income received on Distribution Transformers bonds. | ||||
2-Oct-20 | Fair Value Adjustement A/c ..Dr | 45,000 | ||
To Unrealised Holding Gain A/c | 45,000 | |||
Being Gain on sale of Investment in Bonds A/c adjust to fair value | ||||
2-Oct-20 | Bank/ Cash A/c ..Dr | 645,000 | ||
To Investment in Bonds A/c | 600,000 | |||
To Fair Value adjustment A/c | 45,000 | |||
Being Investment sold( (Distribution Tramsformer Bond) and realised gain | ||||
1-Nov-20 | Investment in Bonds A/c .. Dr | 1,600,000 | ||
To Bank/ Cash A/c | 1,600,000 | |||
Being acquired M&D Corporation 3% bonds at face value | ||||
31-Dec-20 | Interest Accrued A/c .. Dr | 12 lakh*7%*4/12 | 28,000 | |
To Interest Revenue A/c | 28,000 | |||
Being Interest Income accrued for American Instruments bonds | ||||
31-Dec-20 | Interest Accrued A/c .. Dr | 16 lakh*3%*2/12 | 8,000 | |
To Interest Revenue A/c | 8,000 | |||
Being Interest Income accrued for M&D bonds | ||||
31-Dec-20 | Fair Value Adjustement A/c .. Dr | (12lakh+16lakh)-(11.3lakh+16.8lakh) | 10,000 | |
To Unrealised Holding Gain A/c | 10,000 | |||
Being adjust fair value of the investments at year-end |
2)
Income Statement | Working | Amount $ |
Interest revenue | 15K+28K+8K | 51,000 |
Gain on Trading securities | 45K+10K | 55,000 |
Net Income | 106,000 | |
Statement of Comprehensive Income | ||
Net Income | - | 106,000 |
Other Comprehensive Income | - | - |
Comprehensive Income | 106,000 |
Balance Sheet | Working | Amount $ | Amount $ |
Assets | |||
Current Assets | |||
-Interest Receivable | 28K+8K | 36,000 | |
Investments | |||
-Trading Securities at amortized cost | 12lakh +16 lakh | 2,800,000 | |
-Add: Fair Value adjustment | 10,000 | 2,810,000 | |
Liabilities | |||
Shareholders' Equity | |||
-Retained Earnings | 184,000 |