Question

As a long-term investment, Painters' Equipment Company purchased 20% of AMC Supplies Inc.'s 420,000 shares for $500,000 at the beginning of the fiscal year of both companies. On the purchase date, the fair value and book value of AMC’s net assets were equal. During the year, AMC earned net income of $270,000 and distributed cash dividends of 25 cents per share. At year-end, the fair value of the shares is $527,000.

Required:
1. Assume no significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year.
2. Assume significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year.

Answer 1

Solution:

1. Assume no significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year.

S. No	Account titles and explanation	Debit($)	Credit($)	Calculations
1.	Investment A/c Dr	$500,000
	To cash A/c		$500,000
	(To record the purchase of AMC supplies shares)
2.	Cash A/c Dr	$21,000		(20%*420,000*25%)
	To investment revenue A/c		$21,000
	(To record the receipt of the dividend)
3.	Adjustment of fair value A/c Dr	$27,000		(527,000-500,000)
	To Gains and losses of net unrealized holding)		$27,000
	(To record recognize fair value)

2. Assume significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year.

S. No	Account titles and explanation	Debit($)	Credit($)	Calculations
1.	Investment A/c Dr	$500,000
	To cash A/c		$500,000
	(To record the purchase of AMC supplies shares)
2.	Investment A/c Dr	$54,000		(20% * 270,000)
	To investment income A/c		$54,000
	(To record the receipt of the dividend)
3.	Cash A/c Dr	$21,000		(20%*420,000*25%)
	To Investment revenue A/c		$21,000
	(To record recognize investor's share of AMC net income)