Question

(Fair Value Measurement) Presented below is information related to the purchases of common stock by Lilly

Company during 2017.

Cost Fair Value

(at purchase date) (at December 31)

Investment in Arroyo Company stock \(100,000 \) 80,000

Investment in Lee Corporation stock 250,000 300,000

Investment in Woods Inc. stock 180,000 190,000

Total \(530,000 \)570,000

Instructions

(Assume a zero balance for any Fair Value Adjustment account.)

(a) What entry would Lilly make at December 31, 2017, to record the investment in Arroyo Company stock if it chooses to

report this security using the fair value option?

(b) What entry(ies) would Lilly make at December 31, 2017, to record the investments in the Lee and Woods corporations,

assuming that Lilly did not select the fair value option for these investments?

Short answer

a.Unrealized loss is $20,000

b.Unrealized gain is $50,000 and $10,000

Step-by-step solution

fair value adjustment of Arroyo stock

Date	Particulars	Debit	Credit
December 31, 2017	Unrealized holding Gain or loss	$20,000
	Fair value adjustment		$20,000
	(Loss on the fair value adjustment)

Fair value adjustment of Lee and wood stocks

Date	Particulars	Debit	Credit
December 31, 2017	Fair value adjustment	$50,000
	Unrealized holding Gain or loss		$50,000
	(Gain on the fair value adjustment)

Date	Particulars	Debit	Credit
December 31, 2017	Fair value adjustment	$10,000
	Unrealized holding Gain or loss		$10,000
	(Gain on the fair value adjustment)