Problem: (Applying Fair Value Method) Pacers Corp. is a medium-sized corporation specializing in quar-rying stone for building construction. The company has long dominated the market, at one time achiev¬ing a 70% market penetration. During prosperous years, the company's profits, coupled with a conser¬vative dividend policy, resulted in funds available for outside investment. Over the years, Pacers has had a policy of investing idle cash in equity securities. In particular, Pacers has made periodic investments in the company's principal supplier, Ricky Pierce Industries. Although the ruin currently owns 12% of the outstanding common stock of Pierce Industries, Pacers does not have significant influence over the op¬erations of Pierce Industries.
Cheryl Miller has recently joined Pacers as assistant controller, and her first assignment is to prepare the 2004 year-end adjusting entries for the accounts that are valued by the "fair value" rule for financial reporting purpose& Miller has gathered the following information about Pacers' pertinent accounts.
1. Pacers has trading securities Mated to Dale Davis Motors and Rik Smits Electric. During this fis¬cal year, Pacers purchased 100,000 shams of Davis Motors for $1,400,000; these shares currently have a market value of $1,600,000. Pacers' investment in Smits Electric has not been profitable; the company acquired 50,000 shares of Smits in April 2004 at $20 per share, a purchase that currently has a value of $620,000.
2. Prior to 2004, Pacers invested $22,500,000 in Ricky Pierce Industries and has not changed its hold¬ings this year. This investment in Ricky Pierce Industries was valued at $21,500,000 on December 31,2003. Pacers' 12% ownership of Ricky Pierce Industries has a current market value of $22,275,000.
Instructions:
(a) Prepare the appropriate adjusting entries for Pacers as of December 31, 2W4, 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/or notes to Pacers' 2004 Financial statements.