Brooks Corp. is a medium-sized corporation specializing in quarrying stone for b

Question

Brooks 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, Brooks has had a policy of investing idle cash in equity securities. In particular, Brooks 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, 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 2014 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 Brooks' pertinent accounts. Brooks has trading securities related to Delaney Motors and Patrick Electric. During this fiscal year, 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 Electric has not been profitable; the company acquired 50,000 shares of Patrick in April 2014 at $20 per share, a purchase that currently has a value of $720,000. Prior to 2014, Brooks invested $22,500,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,500,000 on December 31, 2013. Brooks' 12% ownership of Norton Industries has a current fair value of $22,225,000. Instructions Prepare the appropriate adjusting entries for Brooks as of December 31, 2014, to reflect the application of the "fair value" rule for both classes of securities described above. For both classes of securities presented above, describe how the results of the valuation adjustments made in (a) would be reflected in the body of and notes to Brooks' 2014 financial statements. Prepare the entries for the Norton investment, assuming that Brooks owns 25% of Norton's shares. Norton reported income of $500,000 in 2014 and paid cash dividends of $100,000.

Explanation / Answer

a Adjustimg Entries Date Account Title Dr $ Cr $ Dec 31.2014. Investment in Trading Securities-Delaney Motors            200,000 Unrealized Holding Gain/(Loss) -Income Statement          200,000 Dec 31.2014. Investment in Trading Securities-Patrick Electric          280,000 Unrealized Holding Gain/(Loss) -Income Statement            280,000 Dec 31.2014. Investment in Available for Sale Security -Norton Industries            725,000 Unrealized Holding Gain/(Loss) -OCI          725,000 b In both the cases the investment would be reflected at Fair   Value in the balance sheet. The unrealixed gain/loss on trading securities will be taken thorugh P/L statement. The unrealized Gain/Loss on Available for sale investment woul be taken to Other comprehensive Income statement as part of Accumulated Other Comprehensive Income statement c In case Boorks owned 25% of Norton then the investment   would be accounted by Equity method. Date Account Title Dr $ Cr $ Dec31.2014. Investment in Norton Industries            125,000 Equity Income - Norton Industries          125,000 ( recording 25% Equity income of Norton) Dec31.2014. Cash               25,000 Investment in Norton Industries            25,000 (recording Dividend receipt from Norton )

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