Problem 12-5 Various transactions related to trading securities [LO12-1, 12-3] T

Question

Problem 12-5 Various transactions related to trading securities [LO12-1, 12-3]

The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2018. 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, 2017.

(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.
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.

Mar. 31 Acquired 8% Distribution Transformers Corporation bonds costing $590,000 at face value. Sep. 1 Acquired $1,470,000 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 $655,000. Nov. 1 Purchased $2,350,000 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:

Explanation / Answer

Answer 1. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 31-Mar Investment in DT Corporation          590,000.00    Cash          590,000.00 (record the bonds accquired of DT Corp.) 1-Sep Investment in AI      1,470,000.00    Cash      1,470,000.00 (record the common stock accquired of AI) 30-Sep Cash            23,600.00 Investment Revenue            23,600.00 (record the interest received from DT Bonds) 2-Oct Cash          655,000.00 Investment in DT Corporation          590,000.00 Gain on sale of Investment            65,000.00 (record the sale of DT Bonds) 1-Nov Investment in M&D Corp.      2,350,000.00    Cash      2,350,000.00 (record the common stock accquired of M&D Corp.) 31-Dec Fair Value Adjustments            38,000.00 Net Unrealized Holding Gain & Losses - OCI            38,000.00 (record the unrealized gain on investments) 31-Dec Interest Receivable            72,500.00 Investment Revenue            72,500.00 (record the dividend accrue from M & D Crp. Bonds) Interest Receivable AI Bonds - $1,470,000 X 10% X 4/12            49,000.00 M&D - $2,350,000 X 6% X 2/12            23,500.00 Total Interest Receivable            72,500.00 Cost Fair Value Difference AI -Bonds    1,470,000.00    1,429,000.00 (41,000.00) M& D -Bonds    2,350,000.00    2,429,000.00     79,000.00 Total    3,820,000.00    3,858,000.00     38,000.00 Answer 2. Income Statement Investment Revenue          96,100.00 Gain on Sale of Investment          65,000.00        161,100.00 Statement of Comprehensive Income Net Unrealized Holding Gains          38,000.00 Balance Sheet Assets Current Assets Securities Available for Sale    3,820,000.00 Add: Fair Value Adjustments          38,000.00    3,858,000.00 Shareholders' Equity Net Unrealized Holding Gains          38,000.00

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