The following selected transactions relate to investment activities of Ornamenta

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.

American Instruments bonds$1,005,000

M&D Corporation bonds$1,715,000

(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.

Mar. 31 Acquired 8% Distribution Transformers Corporation bonds costing $450,000 at face value. Sep. 1 Acquired $1,050,000 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 $500,000. Nov. 1 Purchased $1,650,000 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

1 Date Account titles Debit Credit Mar.31 Investment in distribution transformers bonds 450000 Cash 450000 (Acquired 8% Distribution Transformers Corporation bond) Sep.1 Investment in american instruments bonds 1050000 Cash 1050000 (Acquired $1,050,000 of American Instruments' 10% bonds) Sep.30 Cash 18000 Investment income (450000*8%*6/12) 18000 (Received semiannual interest payment ) Oct.2 Cash 500000 Investment in distribution transformers bonds 450000 Gain on sale of investments 50000 (Sold the Distribution Transformers bonds) Nov.1 Investment in M&D corporation bonds 1650000 Cash 1650000 (Purchased $1,650,000 of M&D Corporation 6% bonds ) Dec.31 Investment income receivable 51500 Investment income 51500 (1050000*10%*4/12)+(1650000*6%*2/12) (Interest accrued) Fair value adjustment 20000 Net unrealized holding gains and losses-OCI 20000 (Note:1) (Fair value sdjustment recorded) Notes: 1. Fair value adjustment Cost Fair value Gain/(loss) American Instruments bonds 1050000 1005000 -45000 M&D Corporation 6% bonds 1650000 1715000 65000 2700000 2720000 20000 2 Income statement Investment income (51500+18000) 69500 Gain on sale of investments 50000 Statement of comprehensive income Net unrealized holding gains and losses-OCI 20000 Balance sheet Current assets Investment income receivable 51500 Securities available for sale (1050000+1650000) 2700000 Add:Fair value adjustment 20000 2720000 Shareholder's equity Net unrealized holding gains and losses-OCI 10000

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