Problem 178 Blue Corp is a mediumsized corporation specializ

Problem 17-8 Blue 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, Blue has had a policy of investing idle cash in equity securities. In particular, Blue 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, Blue does not have significant influence over the operations of Norton Industries. Cheryl Thomas has recently joined Blue as assistant controller, and her first assignment is to prepare the 2017 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 Blue\' pertinent accounts. 1. Blue has equity securities related to Delaney Motors and Patrick Electric. During 2017, Blue purchased 104,000 shares of Delaney Motors for $1,379,000; these shares currently have a fair value of $1,646,000. Blue\' investment in Patrick Electric has not been profitable; the company acquired 47,000 shares of Patrick in April 2017 at $21 per share, a purchase that currently has a value of $703,000. 2. Prior to 2017, Blue invested $22,359,000 in Norton Industries and has not changed its holdings this year This investment in Norton Industries was valued at $21,462,000 on December 31, 2016, Blue, 12% ownership of Norton Industries has a current fair value of $22,095,000 on December 2017

Solution

TRANSACTION AND DATE Account title and explanation Debit($) Credit($) IST PART 1 31-Dec-17 UNREALISED HOLDING GAIN OR LOSS 17000 TO FAIR VALUE ADJUSTMENT(TRADING) $                17,000 IST PART2 FAIR VALUE ADJUSTMENT(AVAILABLE FOR SALE) $              633,000 TO UNREALISED HOLDING GAIN OR LOSS $              633,000 COMPUTATIONS 1 SECURITY COST FAIR VALUE UNREALIZED GAIN/(LOSS) DELANEY MOTORS $          1,379,000 $          1,646,000 $                               267,000 PATRIC ELECTRIC(COST 47000*21) $              987,000 $              703,000 $                             (284,000) TOTAL OF PORTFOLIO $          2,366,000 $          2,349,000 $                               (17,000) 2 COMPUTATION OF UNREALIZED GAIN OR LOSS PRIOR TO 2017 SECURITY COST FAIR VALUE UNREALIZED GAIN/(LOSS) NORTON INDUSTRIES $        22,359,000 $        21,462,000 $                             (897,000) COMPUTATION OF UNREALIZED GAIN OR LOSS IN 2017 SECURITY COST FAIR VALUE UNREALIZED GAIN/(LOSS) NORTON INDUSTRIES $        22,359,000 $        22,095,000 $                             (264,000) PREVIOS FAIR VALUE ADJUSTMENT(CR) $                             (897,000) FAIR VALUE ADJUSTMENT (DR) $                               633,000 TRANSACTION Account title and explanation Debit($) Credit($) EQUITY INVESTMENT(NORTON INDUSTRIES) $              125,000 TO INVESTMENT REVENUE($500000*25%) $              125,000 (TO RECORD REVENUE) CASH(103000*25%) $                25,750 TO EQUITY INVESTMENT(NORTON INDUSTRIES) $                25,750 (TO RECORD DIVIDEND) WITH 25% BLUE HAS SIGNIFICANT INFLUENCE AND SHOULD APPLY THE EQUITY METHOD.NO FAIR VALUE ADJUSTMENTS ARE RECORDED UNDER THE EQUITY METHOD.