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Chapter 13: Q8P (page 658)

(Fair Value and Equity Methods) Brooks Corp. is a medium-sized corporation specializing in quarrying stonefor building construction. The company has long dominated the market, at one time achieving a 70% market penetration. Duringprosperous years, the company鈥檚 profits, coupled with a conservative dividend policy, resulted in funds available for outside

investment. Over the years, Brooks has had a policy of investing idle cash in equity securities. In particular, Brooks has made periodicinvestments in the company鈥檚 principal supplier, Norton Industries. Although the firm currently owns 12% of the outstandingcommon stock of Norton Industries, Brooks does not have significant influence over the operations of Norton Industries.

Cheryl Thomas has recently joined Brooks as assistant controller, and her first assignment is to prepare the 2017 year-endadjusting entries for the accounts that are valued by the 鈥渇air value鈥� rule for financial reporting purposes. Thomas has gatheredthe following information about Brooks鈥� pertinent accounts.

1. Brooks has equity securities related to Delaney Motors and Patrick Electric. During 2017, Brooks purchased 100,000 shares of

Delaney Motors for \(1,400,000; these shares currently have a fair value of \)1,600,000. Brooks鈥� investment in Patrick Electrichas not been profitable; the company acquired 50,000 shares of Patrick in April 2017 at \(20 per share, a purchase that currentlyhas a value of \)720,000.

2. Prior to 2017, Brooks invested \(22,500,000 in Norton Industries and has not changed its holdings this year. This investmentin Norton Industries was valued at \)21,500,000 on December 31, 2016. Brooks鈥� 12% ownership of Norton Industries has acurrent fair value of \(22,225,000 on December 2017.

Instructions

(a) Prepare the appropriate adjusting entries for Brooks as of December 31, 2017, to reflect the application of the 鈥渇airvalue鈥� rule for the securities described above.

(b) For the securities presented above, describe how the results of the valuation adjustments made in (a) would be reflectedin the body of Brooks鈥� 2017 financial statements.

(c) Prepare the entries for the Norton investment, assuming that Brooks owns 25% of Norton鈥檚 shares. Norton reportedincome of \)500,000 in 2017 and paid cash dividends of $100,000.

Short Answer

Expert verified

Unrealized loss in trading securities is $80,000 and unrealized gain on available-for-sale securities is $725,000.

Step by step solution

01

Entry for the fair value adjustment

Date

Particulars

Debit

Credit

December 31, 2017

Unrealized holding loss

$80,000

Fair value adjustment

$80,000

(Being entry of fair value adjustment)

December 31, 2017

Fair value adjustment

$725,000

Unrealized holding gain

$725,000

(Being entry for fair value adjustment)

02

Treatment of unrealized gains and losses.

The unrealized loss on the trading securities will be represented in 鈥榦ther expenses and loses鈥�.

The unrealized gain of available securities will be represented in 鈥榦ther comprehensive income.

03

Entry for the investment income and dividend

Date

Particulars

Debit

Credit

December 31, 2017

Equity Investment

$125,000

Investment Revenue

$125,000

(Entry for the investment revenue)

December 31, 2017

Cash

$25,000

Equity Investment

$25,000

(Entry for the dividend received)

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Most popular questions from this chapter

EXCEL (Equity Securities Entries and Disclosures) Parnevik Company has the following securities in its

investment portfolio on December 31, 2017 (all securities were purchased in 2017): (1) 3,000 shares of Anderson Co. common

stock which cost \(58,500, (2) 10,000 shares of Munter Ltd. common stock which cost \)580,000, and (3) 6,000 shares of King Company

preferred stock which cost \(255,000. The Fair Value Adjustment account shows a credit of \)10,100 at the end of 2017.

In 2018, Parnevik completed the following securities transactions.

1. On January 15, sold 3,000 shares of Anderson鈥檚 common stock at \(22 per share less fees of \)2,150.

2. On April 17, purchased 1,000 shares of Castle鈥檚 common stock at \(33.50 per share plus fees of \)1,980.

On December 31, 2018, the market prices per share of these securities were Munter \(61, King \)40, and Castle $29. In addition, the

accounting supervisor of Parnevik told you that, even though all these securities have readily determinable fair values, Parnevik

will not actively trade these securities because the top management intends to hold them for more than one year.

Instructions

(a) Prepare the entry for the security sale on January 15, 2018.

(b) Prepare the journal entry to record the security purchase on April 17, 2018.

(c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on December 31, 2018.

(d) How should the unrealized gains or losses be reported on Parnevik鈥檚 income statement and balance sheet?

Distinguish between a determinable current liability and a contingent liability. Give two examples of each type.

BE13-5 (L01) Dillons Corporation made credit sales of \(30,000 which are subject to 6% sales tax. The corporation also made cash sales which totalled \)20,670 including the 6% sales tax. (a) Prepare the entry to record Dillons鈥� credit sales. (b) Prepare the entry to record Dillons鈥� cash sales.

Leon Wight, a newly hired loan analyst, is examining the current liabilities of a corporate loan applicant. He observes that unearned revenues have declined in the current year compared to the prior year. Is this a positive indicator about the client鈥檚 liquidity? Explain.

Question: Amsterdam Company uses a periodic inventory system. For April, when the company sold 600 units, the following information is available.

Units Unit Cost Total Cost

April 1 inventory 250 \(10 \) 2,500

April 15 purchase 400 12 4,800

April 23 purchase 350 13 4,550

1,000 $11,850

Compute the April 30 inventory and the April cost of goods sold using the average-cost method.
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