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Chapter 13: Q20E (page 658)

(Fair Value Measurement Issues) Assume the same information as in E17-19 for Lilly Company. In addition,

assume that the investment in the Woods Inc. stock was sold during 2018 for \(195,000. On December 31, 2018, the following

information relates to its two remaining investments of common stock.

Cost Fair Value

(at purchase date) (at December 31)

Investment in Arroyo Company stock \)100,000 \(140,000

Investment in Lee Corporation stock 250,000 310,000

Total \)350,000 \(450,000

Net income before any security gains and losses for 2018 was \)905,000.

Instructions

(a) Compute the amount of net income or net loss that Lilly should report for 2018, taking into consideration Lilly’s securitytransactions for 2018.

(b) Prepare the journal entry to record unrealized gain or loss related to the investment in Arroyo Company stock atDecember 31, 2018.

Short Answer

Expert verified

a.Net income is $920,000

b.Fair value adjustment debited by $40,000 and unrealized holding gain or loss credited by $40,000.

Step by step solution

01

Computation of net income

Net income for 2018: $905,000

Profit on the sale of wood stock is $15,000.

Amount of net income report for 2018:

Net Income=  Income  before  gain or loss+ gain on sale of stock= $905,000+$15,000= $920,000

02

Journal entry related to unrealized gain or loss

Date

Particulars

Debit

Credit

December 31, 2018

Fair value adjustment

$40,000

Unrealized holding Gain or loss

$40,000

(Gain on the fair value adjustment)

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Most popular questions from this chapter

Under what conditions is an employer required to accrue a lability for sick pay? Under what conditions is an employer permitted but not required to accrue a liability for sick pay?

Under what conditions is an employer required to accrue a lability for sick pay? Under what conditions is an employer permitted but not required to accrue a liability for sick pay?

(Fair Value and Equity Methods) Brooks Corp. is a medium-sized corporation specializing in quarrying stonefor building construction. The company has long dominated the market, at one time achieving a 70% market penetration. Duringprosperous years, the company’s profits, coupled with a conservative dividend policy, resulted in funds available for outside

investment. Over the years, Brooks has had a policy of investing idle cash in equity securities. In particular, Brooks has made periodicinvestments in the company’s principal supplier, Norton Industries. Although the firm currently owns 12% of the outstandingcommon stock of Norton Industries, Brooks does not have significant influence over the operations of Norton Industries.

Cheryl Thomas has recently joined Brooks as assistant controller, and her first assignment is to prepare the 2017 year-endadjusting entries for the accounts that are valued by the “fair value” rule for financial reporting purposes. Thomas has gatheredthe following information about Brooks’ pertinent accounts.

1. Brooks has equity securities related to Delaney Motors and Patrick Electric. During 2017, Brooks purchased 100,000 shares of

Delaney Motors for \(1,400,000; these shares currently have a fair value of \)1,600,000. Brooks’ investment in Patrick Electrichas not been profitable; the company acquired 50,000 shares of Patrick in April 2017 at \(20 per share, a purchase that currentlyhas a value of \)720,000.

2. Prior to 2017, Brooks invested \(22,500,000 in Norton Industries and has not changed its holdings this year. This investmentin Norton Industries was valued at \)21,500,000 on December 31, 2016. Brooks’ 12% ownership of Norton Industries has acurrent fair value of \(22,225,000 on December 2017.

Instructions

(a) Prepare the appropriate adjusting entries for Brooks as of December 31, 2017, to reflect the application of the “fairvalue” rule for the securities described above.

(b) For the securities presented above, describe how the results of the valuation adjustments made in (a) would be reflectedin the body of Brooks’ 2017 financial statements.

(c) Prepare the entries for the Norton investment, assuming that Brooks owns 25% of Norton’s shares. Norton reportedincome of \)500,000 in 2017 and paid cash dividends of $100,000.

BE13-7 (L01) Kasten Inc. provides paid vacations to its employees. At December 31, 2017, 30 employees have each earned 2 weeks of vacation time. The employees’ average salary is $500 per week. Prepare Kasten’s December 31, 2017, adjusting entry.

Presented below are two independent cases related to available-for-sale debt investments.

Case 1 Case 2

Amortized cost \(40,000 \)100,000

Fair value 30,000 110,000

Expected credit losses 25,000 92,000

For each case, determine the amount of impairment loss, if any
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