Question

Sweet 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, Sweet has had a policy of investing idle cash in equity securities. In particular, Sweet 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, Sweet does not have significant influence over the operations of Norton Industries. Cheryl Thomas has recently joined Sweet 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 Sweet’ pertinent accounts. 1. Sweet has equity securities related to Delaney Motors and Patrick Electric. During 2017, Sweet purchased 93,000 shares of Delaney Motors for $1,495,000; these shares currently have a fair value of $1,620,000. Sweet’ 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, Sweet 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. Sweet’ 12% ownership of Norton Industries has a current fair value of $22,291,000 on December 2017. Collapse question part (a)

Answer 1

The objective is to assess the Fair Value of Securities invested by Sweet Corp as December 2017.

Now what is Fair Vaue ?

Fair Value is nothing but the value at which the shares can be sold/Purchased in the Market on arms length basis.

Sweet Corp has invested in following three entities as per information given:

Nam of the Entity	No of Securities
DelaneyMotors	93000
Patrick Electric	45000
Norton	12% of Outstanding Stock of Norton

Mark to Market Accounting approach has to be adopted for Valuation of Shares as December 2017.

Lets pass Journal Entries for investment in each Entity:

For Securities held with Norton Industries:

Value as on December 31,2016 :$21,48,9000

Value as December 31 2017:$22,291,000

Unrealized Gain :$802,000.

Hence Journal Entry is

Securities Adjustment A/C Dr:$802,000

To Unrealized Gain A/C Cr:802,0000.

The Value of Investment should be shown under current asset as Dec 31 ,2017 as $22,29,1000 for Norton Industries

For other two entities ie,.Delaney Motors and Patrick Electric, its tabulated below:

Nam of the Entity	No of Securities	Value paid for Ivestment	FV as on Dec 2017	Increase/(decrease) in Value
DelaneyMotors	93000	$    1,495,000.00	$    1,620,000.00	$                  125,000.00
Patrick Electric	45000	$        900,000.00	$        689,000.00	$                (211,000.00)
				$                  (86,000.00)

Unrealized Loss A/C DR 86000

To Securities Adjust ment account CR 86000

The amount that should be reflecting in Balance Sheet as on Dec 31,2017 under Investment Should be:

Nam of the Entity	Fair Value of Investment in Balance Sheet as on Dec 2017
DelaneyMotors	$               1,620,000.00
Patrick Electric	$                   689,000.00
Norton	$             22,291,000.00
	$             24,600,000.00