Question

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021. 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, 2020.

Mar.		31		Acquired 8% Distribution Transformers Corporation bonds costing $510,000 at face value.
Sep.		1		Acquired $1,230,000 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 $590,000.
Nov.		1		Purchased $1,950,000 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	$	1,181,000
M&D Corporation bonds	$	2,021,000

(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.
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.

Income statement: Interest revenue Gain on investments $ 80,900 80,000 160,900 Net income Statement of comprehensive income: Net income $ 22,000 $ 22,000 Comprehensive income Balance sheet: Assets Current Assets Interest receivable $ 60,500 Investments $ 3,180,000 22,000 $ 3,202,000 Investment in bonds Add: Fair value adjustment Shareholders' Equity Other comprehensive income $ 22,000

Answer 1

Income statement:
Interest revenue		80900
Gain on investment		102000
Net income		182900
Statement of comprehensive income:
Net income		182900
Other comprehensive income		0
Comprehensive income		182900
Balance sheet:
Assets
Current assets
Interest receivable		60500
Noncurrent assets:
Investment in bonds	3180000
Add: fair value adjustment	22000	3202000
Shareholders’ equity
Retained earnings		182900

20400+41000+19500 = 80900

80000+22000 = 102000

41000+19500 = 60500

No	Date	General Journal	Debit	Credit
1	March 31, 2021	Investment in Distribution Transformers stock	510,000
		Cash		510,000
2	September 01, 2021	Investment in American Instruments bonds	1230000
		Cash		1230000
3	September 30, 2021	Cash (510000*8%*6/12)	20400
		Interest revenue		20400
4	October 02, 2021	Fair value adjustment	80000
		Unrealized holding gain - NI		80000
5	October 02, 2021	Cash	590000
		Investment in Distribution Transformers stock		510000
		Fair value adjustment		80000
6	November 01, 2021	Investment in M&D Corporation Stock	1950000
		Cash		1950000
7	December 31, 2021	Interest receivable (1230000*10%*4/12)	41000
		Interest revenue		41000
8	December 31, 2021	Interest receivable (1950000*6%*2/12)	19500
		Interest revenue		19500
9	December 31, 2018	Fair value adjustment (2021000-1950000)+(1181000-1230000)	22000
		Unrealized holding gain - NI		22000