Question

Blossom Corp. is a medium-sized corporation specializing in quarrying stone for building construction. The company has long dominated the market, at one time achieving a 70% market penetration. During prosperous years, the company’s profits, coupled with a conservative dividend policy, resulted in funds available for outside investment. Over the years, Blossom has had a policy of investing idle cash in equity securities. In particular, Blossom has made periodic investments in the company’s principal supplier, Norton Industries. Although the firm currently owns 12% of the outstanding common stock of Norton Industries, Blossom does not have significant influence over the operations of Norton Industries.

Cheryl Thomas has recently joined Blossom as assistant controller, and her first assignment is to prepare the 2017 year-end adjusting entries for the accounts that are valued by the “fair value” rule for financial reporting purposes. Thomas has gathered the following information about Blossom’ pertinent accounts.

1.		Blossom has equity securities related to Delaney Motors and Patrick Electric. During 2017, Blossom purchased 93,000 shares of Delaney Motors for $1,495,000; these shares currently have a fair value of $1,620,000. Blossom’ investment in Patrick Electric has not been profitable; the company acquired 45,000 shares of Patrick in April 2017 at $20 per share, a purchase that currently has a value of $689,000.
2.		Prior to 2017, Blossom invested $22,665,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,489,000 on December 31, 2016. Blossom’ 12% ownership of Norton Industries has a current fair value of $22,291,000 on December 2017.

Part 1

Prepare the appropriate adjusting entries for Blossom as of December 31, 2017, to reflect the application of the “fair value” rule for the securities described above. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

Part 2

Prepare the entries for the Norton investment, assuming that Blossom owns 25% of Norton’s shares. Norton reported income of $508,000 in 2017 and paid cash dividends of $103,000. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.	Account Titles and Explanation	Debit	Credit
(1)
	(To record revenue.)
(2)

Answer 1

1.

Journal Entries in the books of Blossom Corp. - Investment In Equity Securities
Date	Accounts And Explanation	Debit ($)	Credit ($)
1	Unrealized Holding Gain or Loss - Income	362000
	Fair Value Adjustment (Trading)		362000
	(Being investment in trading securities recorded)
2	Fair Value Adjustment (Available-For-Sale)	802000
	Unrealized Holding Gain or Loss - Equity		802000
	(Being investment in available-for-sale securities recorded)

Computations:

1.

Security	Cost ($)	Fair Value ($)	Unrealized Gain (Loss) ($)
Delaney Motors	1495000	1620000	125000
Patrick Electric	1176000	689000	-487000
Total Portfolio	2671000	2309000	-362000

2.

Computation Of Unrealized Gain or Loss
Security	Cost ($)	Fair Value ($)	Unrealized Gain (Loss) ($)
Norton Ind.	22665000	21489000	-1176000

Computation Of Unrealized Gain or Loss
Security	Cost ($)	Fair Value ($)	Unrealized Gain (Loss) ($)
Norton Ind.	22665000	22291000	-374000
P­revious Fair Value Adjustment (Cr)			-1176000
Fair Value Adjustment (Dr)			802000

2.

Journal Entries in the books of Blossom Corp.
Date	Accounts And Explanation	Debit ($)	Credit ($)
1	Equity Investments (Norton Industries)	127000
	Investment Revenue ($508000 x 25%)		127000
	(Being entry for the Norton investment recorded)
2	Cash ($103000 x 25%)	25750
	Equity Investments (Norton Industries)		25750
	(Being recorded receipt of equity investments of Norton Industries)

Blossom has significant influence with 25% and should apply the equity method. No fair value adjustments are recorded under the equity method.