Wildcat Welders is a medium-sized company specializing in quarrying stone for building construction. The company has long dominated in the market, at one time achieving 70 percent market penetration. During prosperous years, the companys profits, coupled with a conservative dividend policy, resulted in funds available for outside investment. Over the years, Wildcat has had a policy of investing idle cash in equity investments. In particular, Wildcat has made periodic investments in the companys principal supplier, Norton Industries. Although the firm currently owns 12 percent of the outstanding ordinary shares of Norton Industries, Wildcat does not have significant influence over the operations of Norton Industries.

Cheryl Thomas has recently joined Wildcat 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 purpose. Thomas has gathered the following information about Wildcat s pertinent accounts.

1. Wildcat has trading equity investment related to Delaney Motors and Patrick Electric. During this fiscal year, Wildcat purchased 100,000 shares of Delaney Motors for $1,400,000; these shares currently have a fair value of $1,600,000. Wildcats investments 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. (Trading)

2. Prior to 2022, Wildcat invested $22,500,000 in Norton Industries and has not changed its holding this year. this investment in Norton was valued at $21,500,000 on December 31, 2021. Wildcats 12 percent ownership of Norton Industries has a current fair value of $22,225,000 at the end of December 2022. (Non-trading)

Instructions

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

b. For both classes of investments presented above, briefly describe how the results of the valuation adjustment made in (a) would be reflected in Wildcats financial statements.

c. Prepare the entries for the investment in Norton Industries, assuming that Wildcat owns 25 percent of Nortons shares. Norton reported income of $500,000 in 2022 and paid cash dividends of $100,000.