Question

Brooks 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 conservative dividend policy, resulted in funds available for outside investment. Over the years, Brooks had a policy of investing idle cash in equity securities. In particular Brooks has made periodic investments in the company’s principal supplier, 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 2014 year-end adjusting entries for the accounts that are valued by “Fair Value” rule for financial reporting purposes. Thomas has gathered the following information about Brooks’ accounts.

            1)    Brooks has trading securities related to Delaney Motors and Patrick Electric. During the fiscal year, Brooks purchased 100,000 shares of Delaney Motors for $1,400,000; These shares currently have a fair value of $1,600,000. Brooks’ investment in Patrick has not been profitable and the company is looking for ways to disinvest; The Company acquired 50,000 shares of Patrick in April 2014 at $20 per share, a purchase that has a value of $720,000.

            2) Prior to 2014, Brooks invested $22,500,000 in Norton Industries and has not changed its holdings this year. The investment in Norton was valued at $21,500,000 on  December 31, 2013. Brooks’s 13% ownership in Norton has a current fair value of 22,2500,000.

Required:

(a)  Prepare the appropriate adjusting entries for Brooks as of December 31, 2014 under the fair value method. (6 points)

(b) Prepare the entries for the Norton Investment, assuming that Brooks owns 25% of Norton’s shares. Norton reported income of $500,000 in 2014 and paid cash dividends of $100,000. ( 6 Points)

Answer 1

Ques 1
	Fair Value Adjustment	$645,000
	Unrealized Holding Gain or Loss		$645,000
	Or you can do these 2 entries separately
	Unrealized Holding Gain or Loss-income	$80,000
	Fair Value Adjustment -(trading)		$80,000
	Fair Value Adjustment - (available for sale)	$725,000
	Unrealized Holding Gain or Loss-equity		$725,000
Ques 2
	Equity Investments (Norton Industries)	125,000
	Investment Revenue ($500,000 X 25%)		125,000
	Cash ($100,000 X 25%)	25,000
	Equity Investments (Norton Industries)		25,000
The unrealized holding loss on the valuation of brooks’ trading securities is reported on the income statement. The loss would appear in the “Other Expenses and Losses” section of the income statement. The Fair Value Adjustment is a valuation account and it will be used to show the reduction in the fair value of the trading securities. The trading securities portfolio is disclosed in the balance sheet as a current asset and reported at its fair value. The unrealized holding gain on the valuation of brooks’ available-for-sale securities is reported as other comprehensive income and as a separate component of stockholders’ equity. The Fair Value Adjustment is used to report the increase in fair value of the available-for-sale securities. The fair value of the securities is reported in the Investments section of the balance sheet. It should be noted that a combined statement of income and comprehensive income, a statement of comprehensive income, or a statement of stockholders’ equity would report the components of comprehensive income. The note disclosures for the available-for-sale securities include the aggregate fair value, gross unrealized holding gains, and gross un-realized holding losses. Any change in the net unrealized holding gain or loss account should also be disclosed. The disclosure for trading securities includes the change in net unrealized holding gains or losses which was included in earnings.

Explantaion:

			Unrealized Gain (Loss)
Security	Cost	Fair Value
Delaney Motors	$1,400,000	$1,600,000	$200,000
Patrick Electric	1,000,000	720,000	($280,000)
Total of portfolio	$2,400,000	$2,320,000	($80,000)
Computation of Unrealized Gain or Loss in 2016
		Fair	Unrealized Gain (Loss)
Security	Cost	Value
Norton Ind.	$22,500,000	$21,500,000	($1,000,000)
Computation of Unrealized Gain or Loss in 2017
		Fair	Unrealized Gain (Loss)
Security	Cost	Value
Norton Ind.	$22,500,000	$22,225,000	($275,000)
Previous Fair Value
Adjustment (Cr)			($1,000,000)
Fair Value Adjustment
(Dr)			$725,000