he following selected transactions relate to investment acti

he 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 $530,000 at face value. Sep. 1 Acquired $1,290,000 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 $565,000. Nov. 1 Purchased $2,050,000 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 $ 1,243,000 M&D Corporation bonds $ 2,123,000 (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. 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        530,000.00    Cash          530,000.00 (record the Bonds accquired of DT Corp.) 1-Sep Investment in AI    1,290,000.00    Cash      1,290,000.00 (record the Bonds accquired of AI) 30-Sep Cash          21,200.00 Investment Revenue            21,200.00 (record the Interest received from DT Bonds) 2-Oct Cash        565,000.00 Investment in DT Corporation          530,000.00 Gain on sale of Investment            35,000.00 (record the sale of DT Bonds) 1-Nov Investment in M&D Corp.    2,050,000.00    Cash      2,050,000.00 (record the common stock accquired of M&D Corp.) 31-Dec Investment Revenue Receivable          63,500.00 Investment Revenue            63,500.00 (record the interest due on AI Bonds & M&D Bonds) Interest Revenue: AI Bonds - $1,290,000 X 10% X 4/12          43,000.00 M & D Bonds - $2,050,000 X 6% X 2/12          20,500.00 Total Interest Revenue          63,500.00 31-Dec Fair Value Adjustments          26,000.00 Net Unrealized Holding Gain & Losses - OCI            26,000.00 (record the unrealized gain on investments) Cost Fair Value Difference AI - Bonds    1,290,000.00    1,243,000.00 (47,000.00) M& D - Bonds    2,050,000.00    2,123,000.00     73,000.00 Total    3,340,000.00    3,366,000.00     26,000.00 Answer 2. Income Statement Investment Revenue          84,700.00 Gain on Sale of Investment          35,000.00        119,700.00 Statement of Comprehensive Income Net Unrealized Holding Gains          26,000.00 Balance Sheet Assets Current Assets Securities Available for Sale    3,340,000.00 Add: Fair Value Adjustments          26,000.00    3,366,000.00 Shareholders\' Equity Net Unrealized Holding Gains          26,000.00