Garcia Corporation purchased 22,000 shares of Lee Corporation common stock for $80 per share on January 1,2014.Lee reported net income of $140,000 for 2014 and paid dividends of $90,000 during 2014.As of December 31,2014,the market value of Lee Corporation common stock was $78 per share.Assuming the shares owned by Orlov represent 10 percent of the total outstanding stock of Lee,the year-end adjustment entry in Garcia Corporation's books is:

Question

Quizplus · Accepted Answer

The year-end adjustment entry in Garcia Corporation's books would be to adjust the value of the investment in Lee Corporation to its fair value, which is $78 per share as of December 31, 2014. Since Garcia Corporation purchased 22,000 shares of Lee Corporation common stock for $80 per share, the total cost of the investment is $1,760,000. The fair value of the investment as of December 31, 2014 is $1,716,000 (22,000 shares x $78 per share). Therefore, the adjustment entry would be:

Investment in Lee Corporation        $ 44,000
    Unrealized holding gain or loss     $ 44,000

This adjustment reflects the decrease in value of the investment from $80 per share to $78 per share, resulting in an unrealized holding loss of $44,000. The shares owned by Orlov are not relevant to this adjustment, as the question does not ask for Orlov's share of the adjustment.

Garcia Corporation Purchased 22,000 Shares of Lee Corporation Common Stock