Question

Carla Corp is a medium sized corporation soecializing in quarrying stine 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, Carla has had a policy of investing idle cash in equity securities. In particular Carla had made periodic investments in the company's principal supplier, Norton Industries. Although the furm currently owns 12% of the outstanding common stock of Norton Industries, Carla does not have significant influence over operations of Norton Industries.

Cheryl Thomas has recently joined Carla 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 had gathered the following information about Carla's pertinent accounts.

a. Carla has equity securities related to Delaneg Motors and Patrick Electric. During 2017, Carla purchased 110000 shares of Delaney Motors for $1350000; these shares currently have a fair value of $1574000. Carla's investment in Patrick Electric has not been profitable; the company acquired 47000 shares of Patrick in April 2017 at $21 per share, a purchase that currently has a value of $725000.

b. Prior to 2017, Carla invested $22365000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21538000 on December 31, 2016. Carla 12% ownership of Norton Industries had current fair value of $22192000 on December 2017.

Part 1. Prepare the appropriate adjusting entries for Carla as of December 31, 2017 to reflect the application of the "fair value" rule for the securities described above.

Part 2. Prepare the entries for the Norton investment assuming that Carla owns 25% of Nortons shares. Norton reported incorm of $504000 in 2017 and paid cash dividends of $92000.

Answer 1

In the books of Carla Corp
Adjusting Entries
Part- 1
General Journal
Date	Description	Debit	Credit
	Equity Investments in Delaney Motors- fair value adjustment	$ 2,24,000
	Unrealised Gain on Investments (15,74,000-13,50,000)		$ 2,24,000
	(being equity investments accounted at fair value at the year end)
	Unrealised loss on Investments (7,25,000- 47000*21)	$ 1,36,000
	Equity Investments in Patrick Electric- fair value adjustment		$ 1,36,000
	(being equity investments accounted at fair value at the year end)
	Equity Investments in Norton Industries- fair value adjustment	$ 6,54,000
	Unrealised Gain on Investments (2,21,92,000-2,15,38,000)		$ 6,54,000
	(being equity investments accounted at fair value at the year end)
Part-2
General Journal
Date	Description	Debit	Credit
	Cash	$    23,000
	Dividend from Norton Investments (92000*25%)		$    23,000
	(being dividend received from Norton Industries)
	Investment in Norton Industries (504000*25%-23000)	$ 1,03,000
	Retained Earnings		$ 1,03,000
	(being income from Norton investments accounted)