Question

P17.8 (LO 2, 3) (Fair Value and Equity Methods) Brooks Corp. is a medium-sized corporation spe- cializing in quarrying stone

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Answer #1

a.

1. Journal Entry

Debit Credit
Unrealized Holding Gain or Loss—Income 80,000
Fair Value Adjustment (Trading) 80,000
Investment in trading securities

Calculation :

Cost Fair Value Unrealized Gain (Loss)
Delaney Motors 1,400,000 1,600,000 200,000
Patrick Electric 1,000,000 720,000 -280,000
Total of portfolio 2,400,000 2,320,000 -80,000

2. Journal Entry

Debit Credit
Fair Value Adjustment (Available for Sale) 725,000
Unrealized Holding Gain or Loss—Equity 725,000
Investment in available-for-sale securities

Calculation :

Computation of Unrealized Gain or Loss in 2019
Cost Fair Value Unrealized Gain (Loss)
Norton Industries 22,500,000 21,500,000 -1,000,000
Computation of Unrealized Gain or Loss in 2020
Cost Fair Value Unrealized Gain (Loss)
Norton Industries 22,500,000 22,225,000 -275,000
Previous Fair Value Adjustment -1,000,000
Fair Value Adjustment 725,000

b.

In the Income statement, they will report the unrealized holding loss on the valuation of Brooks’ trading securities. The loss is classified as Other Expenses and Losses. In the balance sheet, they will disclose the trading securities portfolio. It is classified as a current asset and reported at fair value.The reduction in the fair value of the trading securities is shown in the Fair Value Adjustment valuation account. Also to report the increase in fair value of the available-for-sale securities. In the balance sheet, fair value of the securities is reported in the Investments section. In the stockholders’ equity, they will report the, unrealized holding gain on the valuation of Brooks’ available-for-sale securities. It is classified as other comprehensive income.  

A disclosure note will be added for the available-for-sale securities include the aggregate fair value, gross unrealized holding gains, and gross un-realized holding losses. Also if the net unrealized holding gain or loss account shows any differences or changes, it should also be disclosed. Change in net unrealized holding gains or losses are disclosed in the disclosure for trading securities.

c.

Debit Credit
Equity Investments (Norton Industries) 125,000
    Investment Revenue 125,000
Debit Credit
Cash 25,000
Equity Investments (Norton Industries) 25,000

Calculation :

1). Reported Income = 500,000

Percentage of shares owned by Brook = 25%

Investment Revenue = $500,000 X 25% = 125,000

2). Cash Dividend = 100,000

   Percentage of shares owned by Brook = 25%

100,000*25% = 25000

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