Problem 127 Various transactions related to equity investmen

Problem 12-7 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 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 $540,000.

Sep. 1 Acquired $1,110,000 of American Instruments\' common stock.

Sep. 30 Received a $16,200 dividend on the Distribution Transformers common stock.

Oct. 2 Sold the Distribution Transformers common stock for $579,000.

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 $ 1,046,000

M&D Corporation common stock $ 1,635,000

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.

Solution

Answer 1. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 31-Mar Investment in DT Corporation        540,000.00    Cash          540,000.00 (record the common stock accquired of DT Corp.) 1-Sep Investment in AI    1,110,000.00    Cash      1,110,000.00 (record the common stock accquired of AI) 30-Sep Cash          16,200.00 Investment Revenue            16,200.00 (record the dividend received from DT Common Stock) 2-Oct Cash        579,000.00 Investment in DT Corporation          540,000.00 Gain on sale of Investment            39,000.00 (record the sale of DT Common Stock) 1-Nov Investment in M&D Corp.    1,560,000.00    Cash      1,560,000.00 (record the common stock accquired of M&D Corp.)          11,000.00 31-Dec Fair Value Adjustments            11,000.00 Net Unrealized Holding Gain & Losses - OCI (record the unrealized gain on investments) Cost Fair Value Difference AI - Common Stock    1,110,000.00    1,046,000.00 (64,000.00) M& D - Common Stock    1,560,000.00    1,635,000.00     75,000.00 Total    2,670,000.00    2,681,000.00     11,000.00 Answer 2. Income Statement Investment Revenue          16,200.00 Gain on Sale of Investment          39,000.00          55,200.00 Statement of Comprehensive Income Net Unrealized Holding Gains          11,000.00 Balance Sheet Assets Current Assets Securities Available for Sale    2,670,000.00 Add: Fair Value Adjustments          11,000.00    2,681,000.00 Shareholders\' Equity Net Unrealized Holding Gains          11,000.00