The following selected transactions relate to investment activities of Ornamenta
ID: 2582823 • Letter: T
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.
(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.
Note:
Journal entry requiremant 1:
1)Record the acquisition of 8% Distribution Transformers Corporation bonds costing $420,000 at face value.
2)Record the acquisition of 8% Distribution Transformers Corporation bonds costing $420,000 at face value.
3)Record the entry for the semiannual interest received on the Distribution Transformers bonds.
4)Record the entry to adjust to fair value on the date of sale of the Distribution Transformers bonds.
5)Record the entry for sale of Distribution Transformers bonds for $455,000.
6)Record the acquisition of $1,500,000 of M&D Corporation 6% bonds at face value.
7)Record the interest accrual for American Instruments bonds.
8)Record the interest accrual for M&D bonds.
9)Record the entry for Fair-value adjustment.
Requirement 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. (Amounts to be deducted should be indicated with a minus sign.)
Mar. 31 Acquired 8% Distribution Transformers Corporation bonds costing $420,000 at face value. Sep. 1 Acquired $960,000 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 $455,000. Nov. 1 Purchased $1,500,000 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:Explanation / Answer
a) Date Account Title Debit Credit 2018 Mar.31 Investment in Distribution Transformers shares $420,000 Cash $420,000 Sept.1 Investment in American Instruments bonds $960,000 Cash $960,000 Sept.30 Cash ($420,000 x 8%/2) $16,800 Investment revenue $16,800 Oct.2 Cash $455,000 Investment in Distribution Transformers $420,000 Gain on sale of investments $35,000 Nov.1 Investment in M&D Corporation shares $1,500,000 Cash $1,500,000 Dec.31 Investment revenue receivable $32,000 Investment revenue ($960000 x 10% x 4/12) $32,000 Dec.31 Fair value adjustment (calculated below) $14,000 Net unrealized holding gains and losses–OCI $14,000 Available for sale securities Cost Fair market Value Profit/Loss M & D Corporation shares $1,500,000 $1,562,000 $62,000 American Instruments bonds $960,000 $912,000 -$48,000 Totals $2,460,000 $2,474,000 $14,000 b) Income Statement Investment Revenue = $16800 + $32000 $48,800 Gain on sale of investments $35,000 Statement of comprehensive income Net unrealized holding gains and losses on investments $14,000 Balance sheet: Current Assets Investment revenue receivable $32,000 Securities available-for-sale $2,460,000 Add: Fair value adjustment $14,000 $2,474,000 Shareholders’ Equity Net unrealized holding gains and losses on investments $14,000
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