Brooks Corp. is a medium-sized company 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 investments. In particular, Brooks has made periodic investments in the company’s principal supplier, Norton Industries. Although the firm currently owns 12% of the outstanding ordinary shares 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 2022 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.

1. Brooks has trading equity investments 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 2022 at $20 per share, a purchase that currently has a value of $720,000.

2. Prior to 2022, 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, 2021. Brooks’ 12% ownership of Norton Industries has a current fair value of $22,225,000. 

Instructions

a. Prepare the appropriate adjusting entries for Brooks as of December 31, 2022, to reflect the application of the “fair value” rule for both classes of investments described above.

b. For both classes of investments presented above, describe how the results of the valuation adjustments made in (a) would be reflected in Brooks’ 2022 financial statements.

c. Prepare the entries for the Norton investment, assuming that Brooks owns 25% of Norton’s shares. Norton reported income of $500,000 in 2022 and paid cash dividends of $100,000.