Question

3

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. Mar. 31 Acquired 8% Distribution Transformers Corporation bonds costing $590,000 at face value. Sep. 1 Acquired $1,470,000 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 $655,000. Nov. 1 Purchased $2,350,000 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 M&D Corporation bonds $1,429,000 $2,429,000 (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.

Answer 1

Available for sale are those securities that are held with intention of selling them before they mature or due date.These securities are to be recorded at fair value. This means that any changes in fair value needs to be immediately reflected in the balance sheet at the end of the period.

Requirement 1

Date	Accounts title and Explanations	Debit ($)	Credit ($)
Mar.31	Investment in 6% Distribution Transformers Corporation bonds	590,000
	Cash		590,000
	(To record shares acquired in Distribution transformers Corporation)
Sept.1	Investment in 10% American Instrument	1470,000
	Cash		1470,000
	(To record bonds acquired in AI)
Sept. 30	Cash ($590,000*8%*6/12)	23,600
	Investment Revenue		23,600
	(To record dividend received in distribution transformer bon investment)
Oct.2	Cash	655,000
	Investment in DT		590,000
	Gain on sale of Investment		65,000
	(To record sale of Distribution transformer investment at gain)
Nov.1	Investment in 6% M&D Corporation bonds	2350,000
	Cash		2350,000
	(To record shares acquired in M&D Corporation)
Dec.31	Investment Revenue Receivable	49,000
	Investment Revenue ($1470,000*10%*4/12)		49,000
	(To record accrued interest for 4 months on the investment in 'AI' bonds)
Dec.31	Fair Value Adjustment	38,000
	Net Unrealized holding gains and losses		38,000
	(To record unrealized gain on investment)
	($1470,000+$2350,000)-($1429,000+$2429,000)

Requirement 2

Income Statement-

Investment Revenue ($23,600 + $49,000)	72,600
Gain on sale of investments	65,000

Statement of Comprehensive Income-

Net unrealized holding gains

38,000

Balance Sheet

Current Assets:
Investment revenue receivable		49,000
Securities available-for-sale ($1470,000+$2350,000)	3820,000
Plus: Fair value adjustment	38,000	3,858,000
Shareholders’ Equity:
Net unrealized holding gains		38,000