Culver 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, Culver has had a policy of investing idle cash in equity securities. In particular, Culver 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, Culver does not have significant influence over the operations of Norton Industries. Cheryl Thomas has recently joined Culver Corp. 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 Culver Corp’s pertinent account.1. Culver Corp. has trading securities related to Delaney Motors and Patrick Electric. During this fiscal year, Culver Corp. 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, Culver Corp. 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.Instructions(a)Prepare the appropriate adjusting entries for Culver Corp. as of December 31, 2010, 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’ 2010 financial statements.(c) Prepare the entries for the Norton investment, assuming that Culver Corp. owns 25% of Norton shares. Norton reported income of $500,000 in 2010 and paid cash dividends of $100,000.
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