Question

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021. The company buys equity securities as noncurrent investments. None of Ornamental's investments are large enough to exert significant influence on the investee. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2020. Mar. 31 Acquired Distribution Transformers Corporation common stock for $590,000. Sep. 1 Acquired $1,185,000 of American Instruments' common stock. Sep. 30 Received a $20,650 dividend on the Distribution Transformers common stock. Oct. 2 Sold the Distribution Transformers common stock for $634,000. Nov. 1 Purchased $1,590,000 of M&D Corporation common stock. Dec. 31 Recorded any necessary adjusting entry(s) relating to the investments. The market prices of the investments are: American Instruments common stock M&D Corporation common stock $1,116,000 $1,669,000 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

1

Journal Entries

Date	Particulars	Debit ($)	Credit ($)
Mar 31	Investment in Equity securities	590000
	To Cash		590000
Sep 1	Investment in Equity securities	1185000
	To Cash		1185000
Sep 30	Cash	20650
	To dividend revenue		20650
Oct 2	Cash	634000
	To Investment in Equity securities		590000
	To Fair value adjustment		44000
Oct 2	Fair value adjustment	44000
	To Gain on investment (unrealized, NI)		44000
Nov 1	Investment in Equity securities	1590000
	To Cash		1590000
Dec 31	Fair value adjustment [American instruments ($1116000 - $1185000) + M&D Corporation ($1669000 - $1590000)]	10000
	To Gain on investment (unrealized, NI)		10000

2

Particulars	Amount ($)	Amount ($)
Income statement
Dividend revenue		20650
Gain on investment ($44000 + $10000)		54000
Net income		74650
Statement of comprehensive income
Net income		74650
Other comprehensive income		0
Comprehensive income		74650
Balance sheet
Assets
Current Assets
Cash ($20650 + $634000 - $590000 - $1185000 - $1590000)		2710350
Non current assets
Investment in Equity securities ($1185000 + $1590000)	2775000
Add: Fair value adjustment	10000	2785000
Shareholders Equity
Retained earnings ($2710350 - $2785000)		74650

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