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 5% Distribution Transformers Corporation bonds costing $410, 000 at face value. Sep. 1 Acquired $915,000 of American Instruments' 8% bonds at face value. Sep. 30 Received semiannual interest payment on the Distribution Transformers bonds. 2 Sold the Distribution Transformers bonds for $436,000. 1 Purchased $1,410, 000 of M&D Corporation 3% bonds at face value. Oct. Nov. Dec. 31 Recorded any necessary adjusting entry(s) relating to the investments. The market prices of the investments are: $ 864,000 $1,471,000 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 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

1. Journal entries:

Debit 410,000 Credit Date Dr. / 31-Mar-21 Dr Cr Explanation Financial Statement Balance Sheet Balance Sheet 410,000 1-Sep-21 Dr 915,000 cs Balance Sheet Balance Sheet 915,000 10,250 30-Sep-21 Dr Cr ($ 410,000 * 5%) / 12 months * 6 months Balance Sheet Income Statement 10,250 2-Oct-21 Dr 26,000 Balance Sheet Other Comprehensive Income Jor 26,000 436,000 2-Oct-21 Dr Tor Balance Sheet Balance Sheet 436,000 2-Oct-21 Dr 26,000 Account Title Investment in Distibution Transformers Corporation Bond Cash (To record the investment) Investment in American Instruments Bond Cash (To record the investment) Cash Interest Revenue |(To record the interest earned on Distribution transformer bond) Investment in Distibution Transformers Corporation Bond Unrealized gain on fair value adjustment (To record fair value adjustment) Cash Investment in Distibution Transformers Corporation Bond |(To record sale of bond and gain realized) Unrealized gain on fair value adjustment Realized gain on fair value adjustment (To transfer unrealized gain to realized gain on sale of bond) Investment in M&D Corporation Bond Cash (To record the investment) Interest Receivable Interest Revenue |(To record interest receivable on American Instrument bond) Interest Receivable Interest Revenue (To record interest receivable on American Instrument bond) Unrealized loss on fair value adjustment Investment in American Instruments Bond (To record fair value adjustment of bond at year end) Investment in M&D Corporation Bond Unrealized gain on fair value adjustment (To record fair value adjustment of bond at year end) Other Comprehensive Income Income Statement 26,000 1,410,000 1-Nov-21 Dr Cr Balance Sheet Balance Sheet 1,410,000 31-Dec-21 Dr 24,400 ($ 915000* 8%) / 12 months* 4 months Balance Sheet Income Statement 24,400 7,050 31-Dec-21 Dr Cr ($ 1410000* 3%) / 12 months* 2 months Balance Sheet Income Statement 7,050 31-Dec-21 Dr 51,000 $915,000 minus $ 864,000 Other Comprehensive Income Balance Sheet 51,000 31-Dec-21 Dr 61,000 $1471,000 minus $ 1410,000 Balance Sheet Other Comprehensive Income 61,000

2. Income Statement, Balance sheet and other comprehensive income totals:

Balance Sheet: Interest Receivable Investment in American Instruments Bond Investment in M&D Corporation Bond 31,450 $ 24,400 + $ 7,050 864,000 1,471,000 2,366,450 Income Statement: Interest Revenue Realized gain on fair value adjustment Net Income Other Comprehensive Income Unrealized gain on fair value adjustment Unrealized loss on fair value adjustment 41,700 $10,250 + $ 24,400 + $ 7,050 26,000 67,700 61,000 -51,000 10,000