Question

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021. The company buys debt securities, not intending to profit from short-term differences in price and not necessarily to hold debt securities to maturity, but to have them available for sale in years when circumstances warrant. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2020.

Mar.		31		Acquired 7% Distribution Transformers Corporation bonds costing $590,000 at face value.
Sep.		1		Acquired $1,185,000 of American Instruments’ 8% bonds at face value.
Sep.		30		Received semiannual interest payment on the Distribution Transformers bonds.
Oct.		2		Sold the Distribution Transformers bonds for $634,000.
Nov.		1		Purchased $1,590,000 of M&D Corporation 5% 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	$	1,116,000
M&D Corporation bonds	$	1,669,000

(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. For any sales, prepare entries to update the fair-value adjustment, record any reclassification adjustment, and record the sale.
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

Ornamental Insulation Corporation
Date	General Journal	Debit	Credit
March 31, 2021	Investment in Distribution Transformer Bond	590000
	To Cash A/c		590000
September 1, 2021	Investment in American Instruments bonds	1185000
	To Cash A/c		1185000
September 30, 2021	Cash A/c	20650
	To Interest Revenue A/c		20650
	(590000*7%*6/12)
October 2, 2021	Fair Value adjustment A/c	44000
	To Unrealised holding gain		44000
	(634000-590000)
October 2, 2021	Cash A/c	634000
	To Investment in Distribuion Transformer bonds		590000
	To Gain on sale of investment A/c		44000
November 1, 2021	Investment in M&D Corporation bonds	1590000
	To Cash A/c		1590000
December 31, 2021	Interest Receivable A/c	31600
	To Investment Revenue A/c		31600
	($1185000*8%*4/12)
December 31, 2021	Interest Receivable A/c	13250
	To Investment Revenue A/c		13250
	($1590000*5%*2/12)
December 31, 2021	Fair value Adjustment A/c	10000
	To Unrealised holding gain		10000
	Working
		Fair value	Cost	Fair value-cost
	American Instrument bond	1116000	1185000	-69000
	M&D Corporation bond	1669000	1590000	79000
	Net unrealized holding gain	2785000	2775000	10000
	Income Statement	Amount $
	Investmet Revenue   (20650+31600+13250)	65500
	Gain on sale of Investment	44000
	Net Income	109500
	Statement of Comprehensive Income	Amount $
	Net Income	109500
	Net Unrealised holding gain on Investment	10000
	Total Comprehensive Income	119500
	Balance Sheet for the period ended 31st December 2021
	Assets	Amount $	Amount $
	Current Assets
	Investment Revenue Receivable		44850
	Securities available for sale
	(Investment in American instrument&M&D Corporation)	2775000
	Add: Fair value adjustment	10000	2785000
	Share holders equity
	Accumulated other comprehensive income
	Net Unrealized holding gain		10000