The following selected transactions relate to investment activities of Ornamenta

Question

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 $430,000 at face value. Sep. 1 Acquired $990,000 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 $470,000. Nov. 1 Purchased $1,550,000 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 a. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 31-Mar Investment in DT Bonds                                    Dr.          430,000    To Cash          430,000 (Record the purchase of DT Bonds) 1-Sep Investment in America Inst. Bonds             Dr.          990,000    To Cash          990,000 (Record the purchase of American Instrument Bonds) 30-Sep Cash                                                                          Dr.            17,200 $430,000 X 8% X 6/12    To Interest Revenue            17,200 $430,000 X 8% X 6/12 (Record the interest revenue from DT Bonds) 2-Oct Cash                                                                          Dr.          470,000    To Investment in DT Bonds          430,000    To Gain on sale of Investment            40,000 $470,000 - $430,000 (Record the sale of DT Bonds) 1-Nov Investment in M&D Corp. Bonds                  Dr.      1,550,000    To Cash      1,550,000 (Record the purchase of M&D Corp. Bonds) 31-Dec Interest receivable                                            Dr.            48,500     To Interest Revenue            48,500 (Record the Accrued interest on American Instrument Bonds & M&D Corp. Bonds) Accrued Interest: American Instrument - $990,000 X 10% X 4/12            33,000 M&D Corp. - $1,550,000 X 6% X 2/12            15,500 Total            48,500 31-Dec Fair Value Adjustment                                      Dr.            16,000    To Unrealized Holding Gain & Losses            16,000 (record the fair value adjustment on investments) Cost Market Value American Instrument          990,000          943,000 M&D Corp.      1,550,000      1,613,000 Total      2,540,000      2,556,000 Fair Value Adjustment            16,000 Answer b. Income Statement Interest Revenue - $17,200 + $48,500 65700 Gain on sale of Investments          40,000 Statement of Comprehensive Income Net Unrealized Holding Gains          16,000 Balance Sheet Current Assets: Interest Revenue Receivable          48,500 Securities - Available for Sale    2,540,000 Add: Fair Value adjustment          16,000    2,556,000 Shareholders' Equity Net Unrealized Holding Gains          16,000

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---