Question

In: Accounting

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021. The company...

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

  • Record the acquisition of 5% Distribution Transformers Corporation bonds costing $600,000 at face value.

Note: Enter debits before credits.


  • Record the acquisition of $1,200,000 of American Instruments’ 7% bonds at face value.

Note: Enter debits before credits.


  • Record the entry for the semiannual interest received on the Distribution Transformers bonds.

Note: Enter debits before credits.

Date General Journal Debit Credit
September 30, 2021
  • Record the entry to adjust to fair value on the date of sale of the Distribution Transformers bonds.

Note: Enter debits before credits.

Date General Journal Debit Credit
October 02, 2021

  • Record the entry for the reclassification adjustment on the date of sale.

Note: Enter debits before credits.


  • Record the entry for sale of Distribution Transformers bonds for $645,000.

Note: Enter debits before credits.


  • Record the acquisition of $1,600,000 of M&D Corporation 3% bonds at face value.

Note: Enter debits before credits.


  • Record the interest accrual for American Instruments bonds.

Note: Enter debits before credits.


  • Record the interest accrual for M&D bonds.

Note: Enter debits before credits.


  • Record the entry to adjust fair value of the investments at year-end.

Note: Enter debits before credits.

Solutions

Expert Solution

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

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