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Fair Value and Equity Methods Assignment

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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. In 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 Brooks' pertinent accounts.

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.
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, 2009. Brooks' 12% ownership of Norton Industries has a current market value of $22,225,000.

Prepare the appropriate adjusting entries for Brooks as of December 31, 2010, to reflect the application of the "fair value" rule for both classes of securities described above.

Description/Account Debit Credit

(Investment in trading securities.)

(Investment in available-for-sale securities.)

Prepare the entries for the Norton investment, assuming that Brooks owns 25% of Norton's shares. Norton reported income of $500,000 in 2010 and paid cash dividends of $100,000.

Description/Account Debit Credit

Cash

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Solution Preview

Prepare the appropriate adjusting entries for Brooks as of December 31, 2010, to reflect the application of the "fair value" rule for both classes of securities described above.

We need several computations first, to determine the amount of our adjusting entries.

1,400,000 - 1,600,000 = 200,000
1,000,000 - 720,000 = (280,000)
200,000 - ...

Solution Summary

Prepare the appropriate adjusting entries for Brooks as of December 31, 2010, to reflect the application of the "fair value" rule for both classes of securities described above.

Description/Account Debit Credit

(Investment in trading securities.)

(Investment in available-for-sale securities.)

Prepare the entries for the Norton investment, assuming that Brooks owns 25% of Norton's shares. Norton reported income of $500,000 in 2010 and paid cash dividends of $100,000.

Description/Account Debit Credit

$2.19
See Also This Related BrainMass Solution

Restructuring Debt using the settlement of debt method

Individual Assignment: Restructuring Debt

Your company is in financial trouble and is in the process of reorganization. Your manager wants to know how you will report on restructuring the debt. Use the following information to help with this assignment.

Part A

ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 108,340
Trade accounts receivable, net of allowances 2,866,260
Other receivables 62,150
Operating supplies, at lower of average
cost or market 58,630
Prepaid expenses 446,050

Total Current Assets 3,541,430

PROPERTY, PLANT AND EQUIPMENT (at cost)
Land 1,950,000
Buildings and improvements 2,327,410
Equipment 5,015,660
Other equipment and leasehold improvements 1,645,580
total 10,938,650
Accumulated depreciation and amortization (7,644,430)
Net Property, Plant, and Equipment 3,294,220
OTHER ASSETS
Deposits and other assets 1,000,080

TOTAL ASSETS $ 7,835,730

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
Accounts payable $ 972,160
Accrued liabilities 2,071,270
Accrued claims costs 793,620
Federal and other income taxes 19,710
Deferred income taxes 500
Current maturities of long-term debt and
capital lease obligations 50,610
Short-term borrowings 249,250
Total Current Liabilities 4,157,120

LONG-TERM LIABILITIES
Capital lease obligation 54,580
Note Outstanding 3,000,000
Mortgage Outstanding 608,030
Other liabilities 95,860
Total Long-term Liabilities 3,758,470

Total Liabilities 7,915,590

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value; authorized
500,000 shares; issued 231,000 shares 2,310
Additional paid-in capital 731,090
Accumulated other comprehensive loss (113,500)
Retained earnings (deficit) (639,180)
Treasury stock (60,580)
Total Shareholders' Equity (Deficit) (79,860)

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,835,730

Part B

As stipulated, your company is having financial difficulty and has asked the bank to restructure its $3 million note outstanding. The present note has three years remaining and pays a current interest rate of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value. The bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of $1,950,000 and a fair value of $2,400,000.

The company provides the following information related to its post-employment benefits for the year 2007:

• Accumulated postretirement benefit obligation at January 1, 2007 $810,000
• Actual and expected return on plan assets $34,000
• Unrecognized prior service cost amortization $21,000
• Discount rate 10%
• Service cost $88,000

Part A
Provide your manager a comparison of the current reporting for debt, explaining the requirements for each type (bond, mortgage, capital lease, and others). Then, prepare the journal entries for the restructuring.

Part B
To satisfy various benefit issues that have arisen as a result of the restructuring, new post-employment benefits have been created. The company currently has a defined benefits plan and is considering switching to a defined contribution plan to save costs. Compute the costs associated with keeping the current plan versus the costs of a defined contribution plan where the employer pays 3% of payroll. The agreement is that the employees get to keep what is already in the defined benefit plan. This prevents the situation of having to compute how much the company would recapture in surplus assets resulting from terminating the old plan. Then, compute a new post-employment benefit expense for 2007 and report this to your manager. Illustrate with schedules and notes.

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