Revenue Recognition

Brooks 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, Brooks has had a policy of investing idle cash in equity securities. I particular, Brooks 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, 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 2010 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 Brook’s pertinent account.

1. Brooks has trading securities 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 market value of $1,600,000. Brooks’ investment in Patrick Electric has not been profitable; the company acquired 50,000 shares of Patrick in April 2010 at $20 per share, a purchase that currently has a value of $720,000.

2. Prior to 2010, 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, 20013. Brooks’ 12% ownership of Norton Industries has a current market value of $22,225,000.



(a)Prepare the appropriate adjusting entries for Brooks as of December 31, 2014, to reflect the application of the “fair value” rule for both classes of securities described above.
(b)For both classes of securities presented above, describe how the results of the valuation adjustments made in (a) would be reflected in the body of and notes to Brooks’ 2014 financial statements.



(a)     1.      Investment in trading securities:


Unrealized Holding Gain or Loss—Income…………………………         80,000

Fair Value Adjustment (trading)………………………………….                               80,000


  1. Investment in available-for-sale securities:


Fair Value Adjustment (available-for-sale)…………………………..       725,000

Unrealized Holding Gain or Loss—Equity………………….                            725,000











Fair Value

Unrealized Gain (Loss)
  Delaney Motors $1,400,000 $1,600,000 ($(200,000
  Patrick Electric   1,000,000      720,000 (  (280,000)
             Total of portfolio $2,400,000 $2,320,000 ($  (80,000)


2. Computation of Unrealized Gain or Loss in 2013








Unrealized Gain (Loss)
  Norton Ind. $22,500,000 $21,500,000 (($1,000,000)


  Computation of Unrealized Gain or Loss in 2014








Unrealized Gain (Loss)
  Norton Ind. $22,500,000 $22,225,000 $   (275,000)


Previous Fair Value

Adjustment (Cr)



Fair Value Adjustment


$    725,000


(b)     The unrealized holding loss on the valuation of Brooks’ trading securities is reported on the income statement. The loss would appear in the “Other expenses and losses” section of the income statement. The Fair Value Adjustment is a valuation account and it will be used to show the reduction in the fair value of the trading securities. The trading securities portfolio is disclosed in the balance sheet as a current asset and reported at its fair value.


The unrealized holding gain on the valuation of Brooks’ available-for-sale securities is reported as other comprehensive income and as a separate component of stockholders’ equity. The Fair Value Adjustment account is used to report the increase in fair value of the available-for-sale securities. The fair value of the securities is reported in the Investments section of the balance sheet. It should be noted that a combined statement of income and comprehensive income, a statement of comprehensive income, or a statement of stockholders’ equity would report the components of comprehensive income.


The note disclosures for the available-for-sale securities include the aggregate fair value, gross unrealized holding gains, and gross un-realized holding losses. Any change in the net unrealized holding gain or loss account should also be disclosed. The disclosure for trading securities includes the change in net unrealized holding gains or losses which was included in earnings.


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