Question

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2018. The company buys equity securities as 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, 2017.

Mar.		31		Acquired Distribution Transformers Corporation common stock for $550,000.
Sep.		1		Acquired $1,125,000 of American Instruments' common stock.
Sep.		30		Received a $22,000 dividend on the Distribution Transformers common stock.
Oct.		2		Sold the Distribution Transformers common stock for $590,000.
Nov.		1		Purchased $1,550,000 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	$	1,060,000
M&D Corporation common stock	$	1,625,000

Required:
1. Prepare the appropriate journal entry for each transaction or event during 2018, as well as any adjusting entries necessary at year end.
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

1.

The following entries will be prepared to record the given transactions and the required adjustment on December 31:

Date	Account Titles and Explanation	Debit	Credit
Mar. 31	Available for Sale Securities	550000
	Cash		550000
Sept. 1	Available for Sale Securities	1125000
	Cash		1125000
Sept. 30	Cash	22000
	Dividend Income		22000
Oct. 2	Cash	590000
	Available for Sales Securities		550000
	Income from sale of investments		40000
Nov. 1	Available for Sale Securities	1550000
	Cash		1550000
Dec. 31	Available for Sale Securities	10000
	Unrealized Gain/Loss - Other Comprehensive Income		10000

Working note:

Unrealized gain/loss is calculated in the following manner:

	(A)	(B)	(B - A)
	Cost	Market Value	Unrealized Gain/(loss)
A Instruments	1125000	1060000	-65000
M&D Corporation	1550000	1625000	75000
Net unrealized gain/(loss)			10000

2.

Dividend income of $22,000 and gain on sale of investments $40,000 will be reported on the 2018 income statement.

Unrealized gain of $10,000 will be reported on the balance sheet in the stockholders' equity section.

Available for sale securities of $2685000 will be reported on the balance sheet in the assets section under the heading investments.