Question

CALCULATOR FULL SCREEN PRINTER VERSION BACK! NEX Problem 17-08 Metlock 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, Metlock has had a policy of investing idle cash in equity securities. In particular, Metlock 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, Metlock does not have significant influence over the operations of Norton Industries. Cheryl Thomas has recently joined Metlock 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 Metlock' pertinent accounts. 1. Metlock has equity securities related to Delaney Motors and Patrick Electric. During 2020, Metlock purchased 108,000 shares of Delaney Motors for $1,347,000; these shares currently have a fair value of $1,598,000. Metlock' investment in Patrick Electric has not been profitable; the company acquired 50,000 shares of Patrick in April 2020 at $20 per share, a purchase that currently has a value of $737,000. Prior to 2020, Metlock invested $22,505,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,535,000 on December 31, 2019. Metlock' 12% ownership of Norton Industries has a current fair value of $22,373,000 on December 2020. 2. Prepare the appropriate adjusting entries for Metlock as of December 31, 2020, 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 o for the amounts.) Account Titles and Explanation Debit Credit

Answer 1

Solution:

Question:1

Date	Account title and explanation	Debit	Credit
2020	Fair Value Adjustment	$ 826,000
	Unrealized Holding gain or loss		$826,000
	[Being equity investment is adjusted to fair value]

Note:

1) Calculation of Unrealized Gain/(loss)

Investment	Purchase Value/Prior Year Closing	Value at year end	Unrealized Gain/(loss)
Delaney Motors	$            1,347,000	$     1,598,000	$             251,000
Patrick Electric	$            1,000,000	$         737,000	$           (263,000)
Norton Industries	$          21,535,000	$   22,373,000	$             838,000
Total			$             826,000

2) Under fair value rule, investments are recorded at fair value at year end.

3) Here in this question, Norton Industries purchased equity in 2019. So, 2019 year end fair value will be considered in calculation of unrealized gain or loss of investment.

Question:2

NO.	Account Title and Explanation	Debit	Credit
1	Equity Investment-Norton Industries ($482,000 * 25%)	$120,500
	Investment Income		$120,500
	[To record revenue]
2	Cash ( $109,000 *25%)	$27,250
	Equity Investment-Norton Industries		$27,250
	[To record dividends]

Notes:

1) Dividend received will be deducted from the investment because dividend is a part of equity income, we have already recorded the equity income and if we record dividend also then it will be like a part of equity income recorded twice.