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Pharoah Corp. is a medium-sized corporation specializing in quarrying stone for building construction. The company has...

Pharoah 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, Pharoah has had a policy of investing idle cash in equity securities. In particular, Pharoah 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, Pharoah does not have significant influence over the operations of Norton Industries.

Cheryl Thomas has recently joined Pharoah 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 Pharoah’ pertinent accounts.

1. Pharoah has equity securities related to Delaney Motors and Patrick Electric. During 2017, Pharoah purchased 90,000 shares of Delaney Motors for $1,432,000; these shares currently have a fair value of $1,658,000. Pharoah’ investment in Patrick Electric has not been profitable; the company acquired 55,000 shares of Patrick in April 2017 at $20 per share, a purchase that currently has a value of $710,000.
2. Prior to 2017, Pharoah invested $22,551,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,682,000 on December 31, 2016. Pharoah’ 12% ownership of Norton Industries has a current fair value of $22,444,000 on December 2017.

Prepare the appropriate adjusting entries for Pharoah 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

Prepare the entries for the Norton investment, assuming that Pharoah owns 25% of Norton’s shares. Norton reported income of $490,000 in 2017 and paid cash dividends of $93,000. (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)

(To record dividends.)

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ekkarill92 answered 1 year ago
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