Question

As a long-term investment, Painters' Equipment Company purchased 20% of AMC Supplies Inc.'s 480,000 shares for $560,000 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 $330,000 and distributed cash dividends of 25 cents per share. At year-end, the fair value of the shares is $593,000.

2. Assume significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

• Record the purchase of AMC Supplies shares for $560,000 as a long-term investment.
• Record Painters' Equipment's share of AMC Supplies' $330,000 net income.
• Record the cash dividend of 25 cents per share.
• Record any necessary year-end adjusting journal entry when the fair value of the shares held are $593,000 at year-end.

Answer 1

1. Journal Entry in case where no significant influence acquired .. (value in $)

a)    Investment in AMC suppliers A/c Dr. 560000

                 To Cash/Bank A/c       560000

    (Being 480000 share of AMC suppliers purchased)

b)   Profit Share of AMC suppliers - No Entry required

c) Cash/Bank A/c Dr. 120000

          To Investment Revenue A/c 120000

(Being .25 per share dividend received)

d) Fair value of share is $593000 - No journal entry required

In above case Investment account balance is $560000

2. Journal Entry If Significant influence is acquired

a)   Investment in AMC suppliers A/c Dr. 560000

                 To Cash/Bank A/c       560000

   (Being share AMC 480000 share purchased)

b) Investment in AMC suppliers A/c Dr. 66000

         To Investment Revenue A/c 66000

   ( Profit share of AMC suppliers 330000X.2)

c) Cash/Bank A/c Dr 120000

             To Investment in AMC Suppliers A/c 120000

(Dividend received from AMC suppliers which is adjusted in cost of investment)

d) Fair value adjustment - No Entry required

In above case Balance of Investment account is (560000+66000-120000) = $506000