Question

The investments of Harlon Enterprises included the following cost and fair value amounts:

($ in millions)					Fair Value, Dec. 31
Equity Investments	Cost				2018				2019
A Corporation shares		$	30			$	19				na
B Corporation shares			45				45			$	47
C Corporation shares			20				na				19
D Industries shares			50				51				55
Totals		$	145			$	115			$	121

Harlon accounts for its equity investment portfolio at fair value through net income. Harlon sold its holdings of A Corporation shares on June 1, 2019, for $20 million. On September 12, it purchased the C Corporation shares.

Required:
1. What is the effect of the sale of the A Corporation shares and the purchase of the C Corporation shares on Harlon’s 2019 pretax earnings?
2. At what amount should Harlon's securities equity investment portfolio be reported in its 2019 balance sheet?

(For all requirements, enter your answers in millions, (i.e., 10,000,000 should be entered as 10).)

Answer 1

Requirement 1:

First we need to calculate the impact of fair value change at the end of year 2018.

At the end of the year 2018, shares are at $19 million which is less than the opening balance. Difference amount is treated as unrealised holding loss.

For the year 2018 –" A" Corporation shares would be reduced by $11 million ($19 - $30)

journal entry to adjust the fair value of the "A" corporation shares

Date	Accounts title	Debit(millions)	Credit(millions)
Dec 31,18	Unrealized holding loss	$11
	Fair value adjustment		$11

For the year 2019:

"A " Corporation shares would need a fair value adjustment of $10 million as a credit ($20 - $30)

Date	Accounts title	Debit(in millions)	Credit(in millions)
June 1,2019	Fair value adjustment($11-10)	$1
	Unrealized holding loss		$1

june 1,2019	Cash	$20
	Fair value adjustment	$10
	Investment in A corporation shares		$30

   [ To record the sale of investment ]

Finally, unrealized gain of $1 million arises on the sale of A corp. shares shall increase the pre tax earnings

Requirement 2 :

Harlon's securities equity investment portfolio be reported at their fair values of $121 because harlon's is following fair value through net income method, which require investments to report at their fair values