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 $410,000 at face value.
Sep.		1		Acquired $930,000 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 $440,000.
Nov.		1		Purchased $1,450,000 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	$	881,000
M&D Corporation bonds	$	1,511,000

(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.

Answer 1

ANSWER

Part 1

No	Date	General Journal	Debit	Credit
1	March 31, 2021	Investment in Distribution Transformers bonds	410,000
		Cash		410,000
2	September 01, 2021	Investment in American Instruments bonds	930,000
		Cash		930,000
3	September 30, 2021	Cash (410,000 *8%*6/12)	16,400
		Interest revenue		16,400
4	October 02, 2021	Cash	440,000
		Investment in Distribution Transformers bonds		410,000
		Gain on sale of investments		30,000
5	November 01, 2021	Investment in M&D Corporation bonds	1,450,000
		Cash		1,450,000
6	December 31, 2021	Investment revenue receivable	31,000
		Investment revenue (930,000 *10%*4/12)		31,000
7	December 31, 2021	Fair value adjustment	12,000
		Net unrealized holding gains and losses—OCI		12,000

Trading Security Investments	Cost	Fair value	Accumulated unrealized gain (loss)
M&D Corporation shares	1,450,000	1,511,000	61,000
American Instruments bonds	930,000	881,000	(49,000)
Totals—Dec. 31, 2018	2,380,000	2,392,000	12,000

Part 2

income statement:
Interest revenue		16,400
Investment revenue		31,000
Gain on sale of investments		30,000
Statement of comprehensive income:
Net unrealized holding gains on investments		17,400
Balance sheet:
Assets
Current Assets
Investment revenue receivable		31,000
Investments
Securities available ­for­ sale (930,000 +1,450,000 )	2,380,000
Add: Fair value adjustment	12,000	2,392,000
Shareholders’ Equity
Accumulated other comprehensive income
Net unrealized holding gain		12,000

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