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)
	(To record dividends.)

Answer 1

SOLUTION:

(a)   1.   Investment in trading securities:

Unrealized Holding Gain or Loss—

   Income........................................................................ 86,000

Fair Value Adjustment (Trading)...................................   86,000

  2.   Investment in available-for-sale securities:

Fair Value Adjustment (Available-for-Sale)................ 374000

Unrealized Holding Gain or Loss—

   Equity. ($22,665,000-$22,291,000).......................   374000

  Computations:

1.

Security	Cost	Fair Value	Unrealized Gain (Loss)
Delaney Motors	$1,495,000	$1,620,000	($(125000
Patrick Electric	900000(45000*$20)	689,000	(  (211000)
Total of portfolio	$2395000	$2309000	($  (86,000)

2.

Computation of Unrealized Gain or Loss in 2017
Security	Cost	Fair Value	Unrealized Gain (Loss)
Norton Ind.	$22,665,000	$21,489,000	(($1176000)

Computation of Unrealized Gain or Loss in 2018
Security	Cost	Fair Value	Unrealized Gain (Loss)
Norton Ind.	$22,665,000	$22,291,000	$  (374000)
Previous Fair Value Adjustment (Cr)			($1176000)
Fair Value Adjustment (Dr)			$ 802000

(c)   Equity Investments (Norton Industries).................................... 127,000

Investment Revenue ($508,000 X 25%).......................................     127,000

  Cash ($103,000 X 25%).............................................................. 25750

Equity Investments (Norton Industries)........................................     25750

With 25%, Brooks has significant influence and should apply the equity method. No fair value adjustments are recorded under the equity method.