Question

he 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 $600,000 at face value.
Sep.		1		Acquired $1,500,000 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 $670,000.
Nov.		1		Purchased $2,400,000 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	$	1,460,000
M&D Corporation bonds	$	2,480,000

(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.

Prepare the appropriate journal entry for each transaction or event during 2021, as well as any adjusting entries necessary at year end. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

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.)

Answer 1

Available for sale securities could be debt or equity securities listed at a fair market value on the company's balance sheet, and assessed using the fair value method. Any year-end increase or decline in securities fair market value is reported as an unrealized gain or loss in the Other Comprehensive Income (OCI), which forms part of the equity balance sheet segment.

Under the fair value method, the dividends or interest earned from the investment in securities will be regarded as ordinary revenue and credited to the income statement.

1.The appropriate journal entry for each transaction or event during 2021, as well as any adjusting entries necessary at year end:

2021	Particulars	Debit	Credit
March 31	Available-for-sale securities	$600,000
	Cash a/c		$600,000

2021	Particulars	Debit	Credit
Sep 1	Available-for-sale securities	$1,500,000
	Cash a/c		$1,500,000

• $ 600,000 * 8% * 6/12

2021	Particulars	Debit	Credit
Sep 30	Cash a/c	$ 24,000
	Interest Income		$ 24,000

• $ 670,000 - $ 600,000 = $ 70,000

2021	Particulars	Debit	Credit
Oct 2	Available-for-sale securities		$ 600,000
	Cash a/c	$ 670,000
	Realized gain on the sale of Available-for-sale securities		$ 70,000

2021	Particulars	Debit	Credit
Nov 1	Available-for-sale securities	$ 2,400,000
	Cash a/c		$ 2,400,000

• $1,460,000 - $1,500,000 = $40,000

2021	Particulars	Debit	Credit
Dec 31	Available-for-sale securities		$ 40,000
	Unrealized loss-Other comprehensive income	$ 40,000

• $2,480,000 - $2,400,000 = $80,000

2021	Particulars	Debit	Credit
Dec-31	Available-for-sale securities	$ 80,000
	Unrealized Gain-Other comprehensive income		$ 80,000

2. The amounts that Ornamental Insulation would report in its 2021 balance sheet and income statement as a result of these investments are:

Balance Sheet:
Available-for-sale securities	$ 3,940,000
Unrealized Gain-Other comprehensive income	$ 40,000

Income statement:
Dividend income	$ 24,000
Realized gain on the sale of Available-for-sale securities	$ 70,000