Question

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021. The company buys debt securities, not intending to profit from short-term differences in price and not necessarily to hold debt securities to maturity, but to have them available for sale in years when circumstances warrant. Ornamental's fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2020. Mar. 31 Acquired 5% Distribution Transformers Corporation bonds costing $600,000 at face value. Sep. Sep. 30 Received semiannual interest payment on the Distribution Transformers bonds. 1 Acquired $1,200,000 of American Instruments' 7% bonds at face value. 2 Sold the Distribution Transformers bonds for $645,000. 1 Purchased $1,600,000 of M&D Corporation 3% bonds at face value. Oct. Nov. Dec. 31 Recorded any necessary adjusting entry(s) relating to the investments. The market prices of the investments are: $1,130,000 $1,680,000 American Instruments bonds M&D Corporation bonds (Hint: Interest must be accrued.) Required: 1. Prepare the appropriate journal entry for each transaction or event during 2021, as well as any adjusting entries necessary at year end. For any sales, prepare entries to update the fair-value adjustment, record any reclassification adjustment, and record the sale. 2. Indicate any amounts that Ornamental Insulation would report in its 2021 income statement, 2021 statement of comprehensive income, and 12/31/2021 balance sheet as a result of these investments. Include totals for net income, comprehensive income, and retained earnings as a result of these investments. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare the appropriate journal entry for each transaction or event during 2021, as well as any adjusting entries necessary at year end. For any sales, prepare entries to update the fair-value adjustment, record any reclassification adjustment, and record the sale. (If no

Answer 1

Journal entries Date Particulars Debit 31-Mar 5% Bonds $ 600,000 Credit Remarks Distribution Transformers Corporation Bonds Distribution Transformers $ 600,000 Corporation Bonds To Cash (Being Bonds purchased) 1-Sep $ 1,200,000 7% Bonds To Cash (Being Bonds purchased) American Instruments 1,200,000 American Instruments $ 30-Sep Cash $ 15,000 Distribution Transformers Corporation Bonds Distribution Transformers 15,000 Corporation Bonds To Interest Income (Being Interest received as $600,000*5%*6/12)

2-Oct cash $ 645,000 Distribution Transformers Corporation Bonds Distribution Transformers 600,000 Corporation Bonds Distribution Transformers 45,000 Corporation Bonds To 5% Bonds $ To Gain on sale $ 1-Nov $ 1,600,000 3% Bonds To Cash (Being Bonds purchased) $ M&D Corporation 1,600,000 M&D Corporation $ 28,000 American Instruments 28,000 American Instruments $ 31-Dec Interest Accrued To Interest income (Being interest accrued for 4 months as $1,200,000*7%*4/12) $ 8,000 M&D Corporation 8,000 M&D Corporation $ 31-Dec Interest Accrued To Interest income (Being interest accrued for 2 months as $1,600,000*3%*2/12) $ 70,000 31-Dec Unrealized Loss To 7% Bonds $ American Instruments 70,000 American Instruments Refer Note 1 Refer Note 1

$ 80,000 3% Bonds To Unrealized Gain M&D Corporation 80,000 M&D Corporation Refer Note 1 Refer Note 1 $ Note 1 American Instruments M&D Corporation Book value Market value $ 1,200,000 $ 1,130,000 $ $ 1,600,000 $ 1,680,000 $ $ 2,800,000 $ 2,810,000 $ Net Fair value adjustment 70,000 (80,000) (10,000) Income Statement Interest Income Distribution Transformers Corporation Bonds Interest Income American Instruments Interest Income M&D Corporation Gain on sale of Distribution Transformers Corporation Bonds $ $ $ 15,000 28,000 8,000 $ $ 45,000 96,000

Statement of Comprehensive Income Net Unrealized Gain $ 10,000 Refer Note 1 Balance Sheet Current Assets Interest Accrued $ 36,000 Investments- Available for sale American Instruments M&D Corporation $ 1,200,000 $ 1,600,000 $ 2,800,000 $ 10,000 Add: Net Unrealized gain $ 2,810,000 Liabilities & Shareholder's Equity Liabilities $ 96,000 Shareholder's Equity Net income Add: Net Unrealized gain (Other Comprehensive income) $ 10,000 $ 106,000