In: Accounting
Vaughn 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, Vaughn has had a
policy of investing idle cash in equity securities. In particular,
Vaughn 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, Vaughn does
not have significant influence over the operations of Norton
Industries.
Cheryl Thomas has recently joined Vaughn as assistant controller,
and her first assignment is to prepare the 2020 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 Vaughn’ pertinent accounts.
1. | Vaughn has equity securities related to Delaney Motors and Patrick Electric. During 2020, Vaughn purchased 105,000 shares of Delaney Motors for $1,395,000; these shares currently have a fair value of $1,601,000. Vaughn’ investment in Patrick Electric has not been profitable; the company acquired 45,000 shares of Patrick in April 2020 at $21 per share, a purchase that currently has a value of $733,000. | |
2. |
Prior to 2020, Vaughn invested $22,345,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,478,000 on December 31, 2019. Vaughn’ 12% ownership of Norton Industries has a current fair value of $22,020,000 on December 2020. Prepare the appropriate adjusting entries for Vaughn as of December 31, 2020, to reflect the application of the “fair value” rule for the securities described above. Fair Value Adjustment.......... Unrealized Holding Gain or Loss - Income........ Prepare the entries for the Norton investment, assuming that Vaughn owns 25% of Norton’s shares. Norton reported income of $512,000 in 2020 and paid cash dividends of $108,000. Equity Investments......... Investment Income......... Cash........ Equity Investment.......... |
|