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Homework answers / question archive / The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021
The 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 $540,000 at face value. | ||
| Sep. | 1 | Acquired $1,320,000 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 $580,000. | ||
| Nov. | 1 | Purchased $2,100,000 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 | $ | 1,274,000 | |
| M&D Corporation bonds | $ | 2,174,000 | |
(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.
1) Journal entries for each transaction or event during 2021, as well as any adjusting entries necessary at year end:
| Date | Particulars | Debit ($) | Credit ($) |
| Mar 31 | Investment in Corporation bonds a/c | 540,000 | |
| To Cash | 540,000 | ||
| (Recording acquisition of 8% Distribution Transformers Corporation bonds) | |||
| Sep 1 | Investment in American instruments a/c | 1,320,000 | |
| To Cash | 1,320,000 | ||
| (Recording acquisition of 10% American Instruments bonds) | |||
| Sep 30 | Cash a/c | 21,600 | |
| To Interest (540000*8/100*6/12) | 21,600 | ||
| Recording semiannual interest payment on the 8% Distribution Transformers bonds. | |||
| Oct 2 | cash a/c | 580,000 | |
| To Investment in Corporation bonds a/c | 540,000 | ||
| Fair value adustment a/c | 40,000 | ||
| (Recording sale of Investment in Corporation bonds) | |||
| Oct 2 | Fair value adustment a/c | 40,000 | |
| To Unrealized gain a/c | 40,000 | ||
| Nov 1 | Investment in M & D Corporation bonds | 2,100,000 | |
| To cash | 2,100,000 | ||
| (Recording acquisition of 6% M & DCorporation bonds) | |||
| Dec 31 | Interest Receivable a/c | 44,000 | |
| To interest (1,320,000*4/12*10/100) | 44,000 | ||
| (Interest accured on 10% American Instruments bonds) | |||
| Dec 31 | Interest Receivable a/c | 21,000 | |
| To interest (2,100,000*2/12*10/100) | 21,000 | ||
| (Interest accured on 6% M & DCorporation bonds) | |||
| Dec 31 | Fair value adustment a/c | 28,000 | |
|
To Unrealized gain a/c |
28,000 | ||
|
on 10% American Instruments bonds & )(1,274,000-1,320,000 = -46000 on 6% M & DCorporation bonds =2,174,000 - 2,100,000 = 74000 Net = 28,000 gain |
2)
Net Income in Income statement
| Particulars | Calculation | Amount ($) |
| Interest revenue | 21,600 + 44000 + 21000 | 86,600 |
| Add: Unrealized gain | 40,000+28,000 | 68,000 |
| Net Income | 154,600 |
Statement of OCI
| Partuclars | Amount($) |
| Net Income | 154,600 |
| OC |
Balance sheet extract
| Particulars | Amount ($) |
| Interest accured (44,000+21,000) | 65,000 |
| Securities (1,320,000+2,100,000 = 3,420,000) | |
| Add: Unrecognised Gain 28000 | 3,448,000 |
| Share holders equity: | |
| Retained earnings | 154,600 |
