Question

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2018. The company buys debt securities, intending to profit from short-term differences in price and maintaining them in an active trading portfolio. 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 $480,000 at face value.
Sep.		1		Acquired $1,140,000 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 $545,000.
Nov.		1		Purchased $1,800,000 of M&D Corporation 6% 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	$	1,098,000
M&D Corporation bonds	$	1,868,000

Required 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. (Amounts to be deducted should be indicated with a minus sign.) Income statement: Interest revenue $ 75,200 Investment revenue Net income $ 75,200 Statement of comprehensive income: Net income Balance sheet: Assets Current Assets Interest receivable Investments $ 0 Shareholders’ Equity Required 1 Required 2

Answer 1

Journal Entries :-

Date	Particulars	Debit($)	Credit($)
31 Mar.	Investment in DT bonds A/c Dr.	480000
	To Cash A/c		480000
	(To Record acquisition of bonds)
1 Sep.	Investment in AI bonds A/c Dr.	1140000
	To Cash A/c		1140000
	(To Record acquisition of bonds)
30 Sep	Cash A/c Dr. ($480000*8%*(6/12))	19200
	To Interest Revenue A/c		19200
	(To Record receipt of interest income on bonds)
2 Oct.	Cash A/c Dr.	545000
	To Investment in DT bonds A/c		480000
	To Gain on Sale of Bonds($545000-$480000)		65000
	(To record sale of bonds)
1 Nov.	Investment in M&D Corp. Bonds A/c Dr.	1800000
	To Cash A/c		1800000
	(To Record Acquisition of Bonds)
31 Dec.	Interest Receivable A/c Dr. (working note 1)	56000
	To Interest Revenue A/c		56000
	(To Record accrued interest on bonds)
31 Dec.	Fair value Adjustment A/c Dr. (working note 2)	$26000
	To Net Unrealized Holding Gain and Losses		$26000
	(To Record Unrealized gain on Bonds)

Working Note :-

1) Interest Revenue :-

= $1140000*10%*(4/12) + $1800000*6%(2/12)

= $38000 + $18000

= $56000

2) Net Unrealized Gain on Bonds :-

Particulars	Face Value (a)	Market Value (b)	Unrealized Holding Gain/(Loss) c = (b-a)
AI Bonds	$1140000	$1098000	($42000)
M&D Corp Bonds	$1800000	$1868000	$68000
Net Unrealized Holding Gain			$26000

Income Statement :-

Particulars	Amount($)
Interest Revenue ($19200+$56000)	75200
Gain on Sale of Bonds	65000
	140200

Statement of Comprehensive Income :-

Particulars	Amount($)
Net Unrealized Holding Gain	26000
	26000

Balance Sheet ;-

Current Assets :-
Interest Receivable	$56000
Investments :-
Investment in AI and M&D Corp Bonds	$2940000
Add : Fair Value Adjustment	$26000
	$2966000
Shareholder's Equity :-
Accumulated Other Comprehensive Income	26000