Question

Problem 17-08 (Part Level Submission)

Ayayai 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, Ayayai has had a policy of investing idle cash in equity securities. In particular, Ayayai 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, Ayayai does not have significant influence over the operations of Norton Industries.

Cheryl Thomas has recently joined Ayayai 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 Ayayai’ pertinent accounts.

1.		Ayayai has equity securities related to Delaney Motors and Patrick Electric. During 2020, Ayayai purchased 103,000 shares of Delaney Motors for $1,365,000; these shares currently have a fair value of $1,574,000. Ayayai’ investment in Patrick Electric has not been profitable; the company acquired 48,000 shares of Patrick in April 2020 at $21 per share, a purchase that currently has a value of $747,000.
2.		Prior to 2020, Ayayai invested $22,431,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,483,000 on December 31, 2019. Ayayai’ 12% ownership of Norton Industries has a current fair value of $22,056,000 on December 2020.

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

Answer 1

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