Problem 17-8 Flounder Corp. is a medium-sized corporation specializing in quarry
ID: 2538488 • Letter: P
Question
Problem 17-8 Flounder 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 Flounder has had a policy of investing idle cash in equity securities. In particular, Flounder 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, Flounder does not have significant influence over the operations of Norton Industries Cheryl Thomas has recently joined Flounder 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 Flounder' pertinent accounts 1. Flounder has equity securities related to Delaney Motors and Patrick Electric. During 2017, Flounder purchased 99,000 shares of Delaney Motors for $1,466,000; these shares currently have a fair value of $1,529,000 Flounder' investment in Patrick Electric has not been profitable; the company acquired 52,000 shares of Patrick in April 2017 at $21 per share, a purchase that currently has a value of $714,000 2. Prior to 2017, Flounder invested $22,505,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,381,000 on December 31, 2016, Flounder, 12% ownership of Norton Industries has a current fair value of $22,369,000 on December 2017. Prepare the appropriate adjusting entries for Flounder as of December 31, 2017, to reflect the application of the "fair value" rule for the securities described above. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit CreditExplanation / Answer
Journal entries
Date
Particulars
Amount ($)
Amount ($)
31.12.2017
Investment in shares of Delaney Motors
63000
Revaluation reserve
63000
(Being the profit on revaluation of investment is recorded in revaluation reserve)
Note: 1592000-1466000
Profit and loss account
378000
Investment in shares of Patrick Electric
378000
(Being the loss n revaluation recorded in profit and loss account) (Working note 1)
Investment in shares of Norton Industries
988000
Revaluation reserve
988000
(Being the profit on revaluation of investment is recorded in revaluation reserve)
Note: 22369000-21381000
Woking note 1:
Cost of investment in Patrick Electric
1092000
Less: Current value of investment
714000
Loss on fair value
378000
Journal entries
Date
Particulars
Amount ($)
Amount ($)
31.12.2017
Investment in shares of Delaney Motors
63000
Revaluation reserve
63000
(Being the profit on revaluation of investment is recorded in revaluation reserve)
Note: 1592000-1466000
Profit and loss account
378000
Investment in shares of Patrick Electric
378000
(Being the loss n revaluation recorded in profit and loss account) (Working note 1)
Investment in shares of Norton Industries
988000
Revaluation reserve
988000
(Being the profit on revaluation of investment is recorded in revaluation reserve)
Note: 22369000-21381000