Question

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2018. 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 when circumstances warrant. Ornamental's fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2017. Mar. 31 Acquired 6% Distribution Transformers corporation bonds costing $530,000 at face value. Sep. 1 Acquired $1,095,000 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 $568,000 Nov. 1 Purchased $1,530,000 of M&D Corporation 48 bonds costing at face value. Dec. 31 Recorded any necessary adjusting entry(s) relating to the investments. The market prices of the investments are: s1,032,000 $1,603,000 American Instruments bonds M&D Corporation bonds (Hint: Interest must be accrued.) Required 1. Prepare the appropriate journal entry for each transaction or event during 2018, 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 2018 income statement, 2018 statement of comprehensive income, and 12/31/2018 balance sheet as a result of these investments

Answer 1

1.

Date	Account Titles	Debit	Credit
Mar .31	6% Corporation Bonds	530,000
	Cash		530,000
	(Purchase of 6% Corporation bonds)
Sep 1	8% American bonds	1,095,000
	Cash		1,095,000
	(Purchase of 8% American bonds)
Sep 30	Cash	15,900
	Interest Revenue		15,900
	[530,000*6%*1/2]
	(Interest on 6% Corporation bonds)
Oct 2	Cash	568,000
	6% Corporation Bonds		530,000
	Gain on sale of bonds		38,000
	(Sale of 6% Corporation bonds)
Nov 1	4% M&D Corporation Bonds	1,530,000
	Cash		1,530,000
	(Purchase of 4% Corporation bonds)
Dec 31	Interest receivable	10200
	Interest Revenue		10200
	(Interest accrued on 4% Bonds)
	[ 1,530,000* 4%*2/12]
Dec 31	Interest receivable	29200
	Interest Revenue		29200
	(Interest accrued on 8% Bonds)
	[ 1,095,000* 8%*4/12]
Dec 31	4% M&D Corporation Bonds	73,000
	8% American bonds		63,000
	Fair value adjustment		10,000
	(To adjust fair value of the bonds)

2.

Income Statement
Interest Revenue	55,300
Comprehensive Income Statement
Fair value adjustment	10,000

Balance Sheet
Assets
Investments	2,635,000
Shareholders Equity
Accumulated other comprehensive income	10,000