Question

Problem 12-5 (Algo) Various transactions related to trading securities (LO12-1, 12-3] 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 $470,000 at face value. Sep. 1 Acquired $1,110,000 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 $530,000. Nov. 1 Purchased $1,750,000 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 $1,067,000 $1,817,000 (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

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Part 1
No	Date	General Journal	Debit	Credit
1	Mar 31	Investment in Distribution Transformers Bond	$      470,000
		Cash		$       470,000
		(To record investment in bonds)
2	Sep 1	Investment in American Instruments Bond	$ 1,110,000
		Cash		$   1,110,000
		(To record investment in bonds)
3	Sep 30	Cash	$        18,800
		Interest Revenue ($470,000*8%*6/12)		$         18,800
		(To record interest received from bonds)
4	Oct 2	Cash	$      530,000
		Gain on sale of investment		$         60,000
		Investment in Distribution Transformers Bond		$       470,000
		(To record gain in sale of bonds)
5	Nov 1	Investment in H&D Corporation Bond	$ 1,750,000
		Cash		$   1,750,000
		(To record investment in bonds)
6	Dec 31	Interest Receivable	$        37,000
		Interest Revenue ($1,110,000*10%*4/12)		$         37,000
		(To record interest accured on American Bonds)
	Dec 31	Interest Receivable	$        17,500
		Interest Revenue ($1,750,000*6%*2/12)		$         17,500
		(To record interest accured on H&D Corporation)
	Dec 31	Fair value adjustment	$        24,000
		Net unrealized Holding gain/Loss (OCI)		$         24,000
		(To record fair value adjustments)
					Accumulated Unrealized
		Available for Sale Securities	Cost	Fair Value	Gain/(Losses)
		American Instruments	$ 1,110,000	$   1,067,000	$                            -43,000
		H&D Corporation	$ 1,750,000	$   1,817,000	$                              67,000
		Total	$ 2,860,000	$   2,884,000	$                              24,000
Part 2		Income Statement:
		Interest Revenue ($14,100+$26,800+$9,800)		$         73,300
		Gain on sale of Investment		$         60,000
		Statement of Comprehensive Income:
		Net unrealized Holding gain/Loss on investment		$         24,000
		Balance Sheet:
		Assets
		Current assets:
		Interest revenue Receivable ($37,000+$17,500)		$         54,500
		Securities available for sale	$ 2,860,000
		Add: Fair value adjustment	$        24,000	$   2,884,000
		Shareholder's Equity
		Accumulated Other comprehensive income
		Net unrealized Holding gain/Loss on investment		$         24,000