Brooks Corp. is a medium-sized corporation that specializes in quarrying stone for building construction. The company has long dominated the market, and at one time had 70% market penetration. During prosperous years, the company’s profits and conservative dividend policy resulted in funds becoming available for outside investment. Over the years, Brooks has had a policy of investing idle cash in equity instruments of other companies. In particular, Brooks has made periodic investments in the company’s main supplier, Norton Industries Limited. Although Brooks currently owns 18% of the outstanding common shares of Norton, it does not yet have significant influence over the operations of this investee company. Brooks accounts for its investment in Norton using FV-OCI without recycling through net income.

Yasmina Olynyk has recently joined Brooks as assistant controller, and her first assignment is to prepare the 2020 year-end adjusting entries. Olynyk has gathered the following information about Brooks’s relevant investment accounts:

1. In 2020, Brooks acquired shares of Delaney Motors Corp. and Isha Electric Ltd. for short-term trading purposes. Brooks purchased 100,000 shares of Delaney Motors for $1.4 million, and the shares currently have a fair value of $1.6 million. Brooks’s investment in Isha Electric has not been profitable: the company acquired 50,000 shares of Isha at $20 per share and they currently have a fair value of $720,000.

2. Before 2020, Brooks had invested $22.5 million in Norton Industries and, at December 31, 2019, the investment had a fair value of $21.5 million. While Brooks did not sell or purchase any Norton shares this year, Norton declared and paid a dividend totalling $2.4 million on all of its common shares, and reported 2020 net income of $13.8 million. Brooks’s 18% ownership of Norton Industries has a December 31, 2020 fair value of $22,225,000.

Instructions

a. Prepare the appropriate adjusting entries for Brooks as at December 31, 2020.

b. For both categories of investments, describe how the results of the valuation adjustments made in part (a) would appear in the body of and/or notes to Brooks’s 2020 financial statements. Ignore income taxes.

c. Prepare the dividend and adjusting entries for the Norton investment, assuming that Brooks’s 18% interest results in significant influence over Norton’s activities.

d. If Brooks Corp. were a private enterprise and followed ASPE, identify how your answers to parts (a), (b), and (c) would differ.

e. Digging Deeper Could an 18% ownership interest actually result in Brooks having significant influence? Could Brooks have a 45% ownership interest and yet not have significant influence? Explain your answers.