Question

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 6% Distribution Transformers Corporation bonds costing $460,000 at face value.

Sep. 1 Acquired $990,000 of American Instruments’ 8% bonds at face value.

Sep. 30 Received semiannual interest payment on the Distribution Transformers bonds.

Oct. 2 Sold the Distribution Transformers bonds for $491,000.

Nov. 1 Purchased $1,440,000 of M&D Corporation 4% 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 $ 934,000
M&D Corporation bonds $ 1,526,000

(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.

Answer 1

1)

1	31-Mar-21	Investment in Distribution Transformers bonds	460,000
		Cash		460,000
2	01-Sep-21	Investment in American Instruments bonds	990,000
		Cash		990,000
3	30-Sep-21	Cash(460,000*6%*6/12)	13,800
		Interest revenue		13,800
4	02-Oct-21	Fair value adjustment(491,000-460,000)	31,000
		Unrealized holding gain—OCI		31,000
5	02-Oct-21	Reclassification adjustment-OCI	31,000
		Fair value adjustment		31,000
6	02-Oct-21	Cash	491,,000
		Investment in Distribution Transformers bonds		460,000
		Gain on sale of investment		31,000
7	01-Nov-21	Investment in M&D Corporation bonds	1,440,000
		Cash		1,440,000
8	31-Dec-21	Interest receivable(990,000*8%*4/12)	26,400
		Interest revenue		26,400
9	31-Dec-21	Interest receivable(1,440,000*4%*2/12)	9,600
		Interest revenue		9,600
10	31-Dec-21	Fair value adjustment	30,000
		Unrealized holding gain—OCI		30,000
		(934,000+1,526,000-990,000-1,440,000)

2)

income statement:
Interest revenue (13,800 +26,400 +9,600)		$49,800
Gain on sale of investments		31,000
Net income		$80,800
Statement of comprehensive income:
Net income		$80,800
Other comprehensive income
Unrealized holding Gain-OCI	61,000
Reclassification adjustment-OCI	-31,000	30,000
Comprehensive income		$110,800
Balance sheet:
Assets
Current Assets
Interest receivable		$36,000
Investments
Trading securities - amortized cost (990,000+1,440,000)	$2,430,000
Add: Fair value adjustment	30,000	$2,460,000
Shareholders’ Equity
Retained earnings		$80,800
Accumulated-OCI
Accumulated unrealized holding gains		30,000

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