Question

Problem 12-7 (Algo) Various transactions related to equity investments: fair value through net income [LO12-5] The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021. The company buys equity securities as noncurrent investments. None of Ornamental’s investments are large enough to exert significant influence on the investee. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2020. Mar. 31 Acquired Distribution Transformers Corporation common stock for $520,000. Sep. 1 Acquired $1,080,000 of American Instruments' common stock. Sep. 30 Received a $18,200 dividend on the Distribution Transformers common stock. Oct. 2 Sold the Distribution Transformers common stock for $557,000. Nov. 1 Purchased $1,560,000 of M&D Corporation common stock. Dec. 31 Recorded any necessary adjusting entry(s) relating to the investments. The market prices of the investments are: American Instruments common stock $ 1,018,000 M&D Corporation common stock $ 1,640,000 Required: 1. Prepare the appropriate journal entry for each transaction or event during 2021, as well as any adjusting entries necessary at year-end. 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)

Ornamental insulation corporation
Journal for the year ended 31/12/2021
Date	General journal	Debit	Credit
31-03-21	Investment in distributors transforms corporation A/C	$520000
	To cash A/C		$520000
	[Being investment in eq.stock made]
01-09-21	Investment in American instruments common stock A/C	$1080000
	To Cash A/C		$1080000
	[Being investment in eq. Stock made]
30-09-21	Cash A/C	$18200
	To dividend income A/c		$18200
	[Being dividend received on shares held in distributors transforms corporation]
2-10-21	cash A/C	$557000
	To fair value adjustment		$37000
	To investment in distributors transforms corporation A/C		$520000
	[Being investment sold on a profit & profit transferred to OCI A/C
01-11-21	Investment in M & D corporarion A/C	$1560000
	To Cash A/C		$1560000
	[Being investment in eq. Stock made]
31-12-21	fair value adjustmentA/C(1640000-1560000)+(1018000-1080000)	$18000
	To unrealised holding gain - NI		$18000
	[Being adjustment A/C]

2)

Amount mentioned in Net income = dividend revenue+gain on investments =$18200+(80000-62000+37000) =$18200+55000 =$73200

Amount mention in comprehensive income =Net income + other comprehensive income =$73200+$0 =$73200

Assets
Current assets
Dividend receivable	$0
Other receivables	$0
Non current assets:
Investment in equity securities	$2640000
Add: fair value adjustment	$18000	$2658000
Share holders equty
Retained earnings		$73200