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Chapter 13: Q6E (page 658)

(Entries for Equity Securities) The following information is available for Barkley Company at December 31,

2017, regarding its investments.

Securities Cost Fair Value

3,000 shares of Myers Corporation common stock \(40,000 \)48,000

1,000 shares of Cole Incorporated preferred stock 25,000 22,000

\(65,000 \)70,000

Instructions

(a) Prepare the adjusting entry (if any) for 2017, assuming no balance in the Fair Value Adjustment account at January 1,

2017. Neither of Barkley’s investments result in significant influence.

(b) Discuss how the amounts reported in the financial statements are affected by the entries in (a).

Short Answer

Expert verified

Unrealized holding income is $5,000. Fair value adjustment debited by $5,000 and unrealized holding gain / loss income credited by $5,000.

Step by step solution

01

Adjusting entry of the fair value adjustment

Date

Description

Debit

Credit

December 31, 2017

Fair value adjustment

$5,000

Unrealized holding gain/loss- Income

$5,000

Being Entry of fair value recognition

The balance of both common stock and preferred stock is adjusted to find the net fair value adjustment.

02

Effect of the entries in the financial statements

Yes, these entries affect the financial statements because these are related to the income statement that comes under the other comprehensive income.

In this, securities fair value adjustment is added to the investment account to calculate net fair value.

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Most popular questions from this chapter

(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.

How does unearned revenue arise? Why can it be classified properly as a current liability? Give several examples of business activities that result in unearned revenues.

In determining the amount of a provision, a company using IFRS should generally measure:

(a) Using the midpoint of the range between the lowest possible loss and the highest possible loss.

(b) Using the minimum amount of the loss in the range.

(c) Using the best estimate of the amount of the loss expected to occur.

(d) Using the maximum amount of the loss in the range.

How should a debt callable by the creditor be reported in the debtor’s financial statements?

What evidence is necessary to demonstrate the ability to consummate the refinancing of short-term debt?
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