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 6% Distribution Transformers Corporation bonds costing $560,000 at face value.
Sep.		1		Acquired $1,140,000 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 $601,000.
Nov.		1		Purchased $1,560,000 of M&D Corporation 4% bonds costing 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	$	1,074,000
M&D Corporation bonds	$	1,637,000

(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.

• Record the entry to adjust to fair value on the date of sale of the Distribution Transformers bonds.

Note: Enter debits before credits.

	Date General Journal Debit Credit October 02, 2021 Cash Investment in bonds Gain on investments (NI)

• Record the entry for the reclassification adjustment on the date of sale

Note: Enter debits before credits.

	Date General Journal Debit Credit October 02, 2021

• Record the entry for sale of Distribution Transformers bonds for $601,000.

Note: Enter debits before credits.

	Date General Journal Debit Credit October 02, 2021

• Record the acquisition of $1,560,000 of M&D Corporation 4% bonds at face value.

Note: Enter debits before credits.

	Date General Journal Debit Credit November 01, 2021

• Record the interest accrual for American Instruments bonds.

Note: Enter debits before credits.

	Date General Journal Debit Credit December 31, 2021

• Record the interest accrual for M&D bonds.

Note: Enter debits before credits.

	Date General Journal Debit Credit December 31, 2021

• Record the entry for Fair-value adjustment.

Note: Enter debits before credits.

	Date General Journal Debit Credit December 31, 2021

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. (Amounts to be deducted should be indicated with a minus sign.) Income statement: Statement of comprehensive income: Other comprehensive income: Balance sheet: Assets Current Assets Noncurrent Assets

Answer 1

Here's the Journal entries pertaining to said transactions:

31-Mar Dr Investment in Bond $ 560,000 Cash Cr. 560,000 (Being Long term investment in distribution Transformers Corporation Bond accounted) 1-Sep Dr Investment in Bond $1,140,000 $1,140,000 Cr. Cash (Being Long term investment in American Instrument Bond accounted) 30-Sep Dr. Cash $ 16,800 Interest Income Cr 16,800 (Being Interest income received from 6% bond accounted (i.e.) (($560,000*6%)/12months per annum) *6months Cash 2-Oct Dr. $ 601,000 Investment in Bond $ 41,000 Cr 560,000 Unrealized Gain on Investment Cr (being sale of bond accounted along with appropriate gain on sale) Unrealized gain on investment Realized gain on investment |(being gain on sale realized) 2-Oct Dr. 41,000 $ 41,000 Cr. 1-Nov Dr $ 1,560,000 Investment in Bond $ 1,560,000 Cash Cr. (Being Long term investment in M&D Corporation Bond accounted) 31-Dec Dr. Interest Receivable on bond 30,400 $ Interest Income Cr 30,400 (Being interest receivable on American Instrument Bond accrued (i.e.) (($1,140,000*8%) /12months per annum)*4months) 31-Dec Dr. Interest Receivable on bond Interest Income $ 10,400 $ Cr 10,400 (Being interest receivable on M&D Corporation Bond accrued (i.e.) (($1,560,000*4%)/12months per |annum)*2months) 31-Dec Dr. Unrealized loss on investment 66,000 $ Investment in Bond Cr. 66,000 (Being unrealized loss (Fair value adjustment) on American Instrument Bond accounted (i.e.) $1,140,000 less $1,074,000 31-Dec Dr. Investment in Bond $ 77,000 $ Unrealized gain on investment (Being unrealized loss (Fair value adjustment) on M&D Corporation Bond accounted (i.e.) $1,637,000 less $ 1,560,000) Cr. 77,000

Please note that Fair value of investment will be "unrealized" until sale of an asset (i.e.) cannot be part of income statement.

Thus, other schedules are as below:

Income Statement Interest Income from Distribution Transformers Corporation Bond 16,800 Realized Gain on Sale of investment 41,000 Interest Income from American Instrument Bond 30,400 Interest Income from M&D Corporation Bond $ 10,400 Total Net Income c/f to "Retained Earnings" 98,600 Other Comprehensive Income Statement: Unrealized Gain on investment $ American Instrument Bond 77,000 77,000 Less: Unrealized loss on investment M&D Corporation Bond 66,000 Net Other Comprehensive Income to c/f to "Stockholder's equity schedule of Balance Sheet" 11,000 Retained Earnings Statement: Opening Balance c/f from previous year $ Add: Net Income from current year 98,600 Closing Balance to c/f under "Stockholder's equity schedule of Balance Sheet" 98,600 Balance Sheet: Current Assets: Non-Current Asset/ Long Term Investment $ 1,074,000 $ 1,637,000 $ 2,711,000 Investment in 8% American Instrument Bond Investment in 4% M&D corporation Bond Total Non-Current/ Long Term Investment Stockholders Equity Equity Retained Earnings 98,600 $ Other Comprehensive Income Total Stocholders Equity 11,000 $ 109,600 As other items in balance sheet are not included, total not reconciles