Question

Larkspur 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, Larkspur has had a policy of investing idle cash in equity securities. In particular, Larkspur 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, Larkspur does not have significant influence over the operations of Norton Industries. Cheryl Thomas has recently joined Larkspur 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 Larkspur’ pertinent accounts. 1. Larkspur has equity securities related to Delaney Motors and Patrick Electric. During 2020, Larkspur purchased 92,000 shares of Delaney Motors for $1,460,000; these shares currently have a fair value of $1,677,000. Larkspur’ investment in Patrick Electric has not been profitable; the company acquired 51,000 shares of Patrick in April 2020 at $18 per share, a purchase that currently has a value of $688,000. 2. Prior to 2020, Larkspur invested $22,688,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,433,000 on December 31, 2019. Larkspur’ 12% ownership of Norton Industries has a current fair value of $22,446,000 on December 2020.

Prepare the appropriate adjusting entries for Larkspur 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 0 for the amounts.) Account Titles and Explanation Debit Credit

Prepare the entries for the Norton investment, assuming that Larkspur owns 25% of Norton’s shares. Norton reported income of $501,000 in 2020 and paid cash dividends of $103,000. (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 0 for the amounts.) No. Account Titles and Explanation Debit Credit (1) (To record revenue.) (2) (To record dividends.)

Answer 1

Unrealized Gain (Loss) Fair Value Security Cost Delaney Motors $1,460,000 $918,000 $1,677,000 $688,000 $217,000 $230,000) Patrick Electric Total of Portfolio $2,378,000 $2,365,000 ($13,000) Computation of Unrealized Gain or Loss in 2019 Unrealized Gain (Loss) Cost Fair Value Security Norton Industries $22,688,000 $21,433,000 ($1,255,000) Computation of Unrealized Gain or Loss in 2020 Unrealized Gain (Loss) Security Fair Value Cost Norton Industries $22,688,000 $22,446,000 ($242,000) Previous Fair Value ($1,255,000) Adjustment (Cr) Fair Value Adjustment $1,013,000 (Dr) Prepare the appropriate adjusting entries for Larkspuras of December 31, 2020, to reflect the application of the "fair value" rule for the securities. Investment in trading securities: Account Titles and Explanation Debit Credit Unrealized Holding Gain or Loss-Income $13,000 Fair Value Adjustment (Trading) $13,000 Investment in available-for-sale securities: Account Titles and Explanation Debit Credit Fair Value Adjustment (Available-for-Sale) $1,013,000 Unrealized Holding Gain or Loss-Equity $1,013,000

Prepare the entries for the Norton investment, assuming that Larkspur owns 25% of Norton's shares. Norton reported income of $501,000 in 2020 and paid cash dividends of $103,0000 Account Titles and Explanation Debit Credit No. (1) Equity Investments (Norton Industries) $125,250 Investment Revenue ($501,000 X 25 % ) $125,250 (To record revenue.) (2) Cash ($103,000 X 25%) $25,750 Equity Investments (Norton Industries) $25,750 (Torecord dividends.)