Question

Gerald 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, Gerald has had a policy of investing idle cash in equity securities. In particular, Gerald 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, Gerald does not have significant influence over the operations of Norton Industries. Cheryl Thomas has recently joined Gerald as assistant controller, and her first assignment is to prepare the 2020 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 Gerald's pertinent accounts.

1. Gerald has equity securities related to Delaney Motors and Patrick Electric. During 2020, Gerald purchased 110,000 shares of Delaney Motors for $1,350,000; these shares currently have a fair value of $1,574,000. Gerald's investment in Patrick Electric has not been profitable; the company acquired 47,000 shares of Patrick in April 2020 at $21 per share, a purchase that currently has a value of $725,000.

2. Prior to 2020, Gerald invested $22,365,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,538,000 on December 31, 2019. Gerald's 12% ownership of Norton Industries has a current fair value of $22,192,000 on December 2020.

Prepare the appropriate adjusting entries for Gerald as of December 31, 2020, to reflect the application of the “fair value” rule for the securities described above.

Answer 1

In the books of Gerald Corp.

Particulars	Debit ($)	Credit($)
Investment A/c	1,350,000
Bank A/c		1,350,000
(Purchased 110,000 shares of Delaney Motors)
Investment A/c	224,000
Unrealized Profit A/c		224,000
(Unrealized profit on Delaney Motors Investment)
Investment A/c	987,000
Bank A/c		987,000
(Purchased 47,000 shares @ $21 of Patrick Electric)
Unrealized Loss A/c	262,000
Investment A/c		262,000
(Unrealized loss on Patrick Elecrtic Investment)
Investment A/c	22,365,000
Bank A/c		22,365,000
(Purchased shares of Norton Industries prior to 2020)
Unrealized Loss A/c	827,000
Investment A/c		827,000
(Unrealized Loss on Norton Industries as on 31.12.2019)