Question

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2018. 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 when circumstances warrant. 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 $400,000 at face value.
Sep.		1		Acquired $900,000 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 $425,000.
Nov.		1		Purchased $1,400,000 of M&D Corporation 6% bonds costing 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	$	850,000
M&D Corporation bonds	$	1,460,000

(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. 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 2018 income statement, 2018 statement of comprehensive income, and 12/31/2018 balance sheet as a result of these investments.

Answer 1

Answer 1.
Journal Entry
Date	Particulars	Dr. Amt.	Cr. Amt.
31-Mar	Investment in DT Corporation	400,000.00
	Cash		400,000.00
	(record the bonds accquired of DT Corp.)
1-Sep	Investment in AI	900,000.00
	Cash		900,000.00
	(record the bonds accquired of AI)
30-Sep	Cash ($400,000 X 8% X 6/12)	16,000.00
	Investment Revenue		16,000.00
	(record the interest received from DT Bonds)
2-Oct	Cash	425,000.00
	Investment in DT Corporation		400,000.00
	Gain on sale of Investment		25,000.00
	(record the sale of DT Bonds)
1-Nov	Investment in M&D Corp.	1,400,000.00
	Cash		1,400,000.00
	(record the Bonds accquired of M&D Corp.)
31-Dec	Fair Value Adjustments	10,000.00
	Net Unrealized Holding Gain & Losses - OCI		10,000.00
	(record the unrealized gain on investments)
		Cost	Fair Value	Difference
	AI - Bonds	900,000.00	850,000.00	(50,000.00)
	M& D - Bonds	1,400,000.00	1,460,000.00	60,000.00
	Total	2,300,000.00	2,310,000.00	10,000.00
31-Dec	Interest Receivable	44,000.00
	Investment Revenue		44,000.00
	(record the interest accrue from Bonds)
	Interest Receivable
	AI Bonds - $900,000 X 10% X 4/12	30,000.00
	M&D Bonds - $1,400,000 X 6% X 2/12	14,000.00
	Total	44,000.00

Answer 2.
Income Statement
Investment Revenue	60,000.00
Gain on Sale of Investment	25,000.00	85,000.00
Statement of Comprehensive Income
Net Unrealized Holding Gains	10,000.00
Balance Sheet
Assets
Current Assets
Securities Available for Sale	2,300,000.00
Add: Fair Value Adjustments	10,000.00	2,310,000.00
Shareholders' Equity
Net Unrealized Holding Gains		10,000.00