(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.

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:

$\begin{array}{c}\text{Net\hspace{0.17em}Income=\hspace{0.17em}\hspace{0.17em}Income\hspace{0.17em}\hspace{0.17em}before\hspace{0.17em}\hspace{0.17em}gain\hspace{0.17em}or\hspace{0.17em}loss+\hspace{0.17em}gain\hspace{0.17em}on\hspace{0.17em}sale\hspace{0.17em}of\hspace{0.17em}stock}\\ =\$905,000+\$15,000\\ =\$920,000\end{array}$

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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