Answered: The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021. The company buys debt securities, not…

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 8% Distribution Transformers Corporation bonds costing $480,000 at face value.

Sep. 1 Acquired $1,020,000 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 $513,000.

Nov. 1 Purchase $1,480,000 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 $ 962,000

M&D Corporation bonds $1,548,000

(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.

Journal entry worksheet

Record the acquisition of 8% Distribution Transformers Corporation bonds costing $480,000 at face value.
Record the acquisition of $1,020,000 of American Instruments’ 10% bonds at face value.
Record the entry for the semiannual interest received on the Distribution Transformers bonds.
Record the entry to adjust to fair value on the date of sale of the Distribution Transformers bonds.
Record the entry for the reclassification adjustment on the date of sale.
Record the entry for sale of Distribution Transformers bonds for $513,000.
Record the acquisition of $1,480,000 of M&D Corporation 6% bonds at face value.
Record the interest accrual for American Instruments bonds.
Record the interest accrual for M&D bonds.
Record the entry to adjust fair value of the investments at year-end.

Required

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.

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

Expert Solution

Step 1

Journal Entry Worksheet:

Mar. 31: Debit Debt securities $480,000,
Credit Cash $480,000
(To record the acquisition of Distribution Transformers Corporation bonds at face value)

Sep. 1: Debit Debt securities $1,020,000,
Credit Cash $1,020,000
(To record the acquisition of American Instruments’ 10% bonds at face value)

Sep. 30: Debit Cash $19,200,
Credit Interest revenue $19,200
(To record the semi-annual interest received on Distribution Transformers bonds)

Oct. 2: Debit Cash $513,000,
Credit Debt securities $480,000,
Credit Gain on sale of investments $33,000
(To record the sale of Distribution Transformers bonds at a gain)

Oct. 2: Debit Accumulated other comprehensive income $12,800,
Credit Unrealized gain on investments $12,800
(To adjust to fair value on the date of sale of Distribution Transformers bonds)

Nov. 1: Debit Debt securities $1,480,000,
Credit Cash $1,480,000
(To record the acquisition of M&D Corporation 6% bonds at face value)

Dec. 31: Debit Interest receivable $46,200,
Credit Interest revenue $46,200
(To accrue interest revenue for American Instruments’ bonds)

Dec. 31: Debit Interest receivable $44,400,
Credit Interest revenue $44,400
(To accrue interest revenue for M&D Corporation bonds)

Dec. 31: Debit Unrealized gain on investments $48,000,
Credit Accumulated other comprehensive income $48,000
(To adjust fair value of the investments at year-end)

Income Statement: The gain on sale of Distribution Transformers bonds of $33,000 would be reported on the income statement.

Statement of Comprehensive Income:
The adjustment to fair value of investments at year-end would be reported in the statement of comprehensive income as an increase in unrealized gain on investments of $48,000.