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As a long-term investment, Fair Company purchased 20% of Midlin Company’s 300,000 shares for $360,000 at...

As a long-term investment, Fair Company purchased 20% of Midlin Company’s 300,000 shares for $360,000 at the beginning of the reporting year of both companies. During the year, Midlin earned net income of $135,000 and distributed cash dividends of $0.25 per share. At year-end, the fair value of the shares is $375,000. 1. Assume no significant influence was acquired. Record the transactions from the purchase through the end of the year, including any adjustment for the investment’s fair value, if appropriate. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Solutions

Expert Solution

Solution - Journal Entry worksheet (No significant Influence)

Fair Company

Serial Number Accounts Title Debit Credit
1 Investment in Midlin Company shares $360000
Cash $360000
(Investment done in shares of Midlin company from cash)
2 Cash $15000
Dividend Income $15000

(Amount received of dividend issued by midlin company)

Dividend =

(300000 shares * $0.25 Per share) * 20%

= $15000
3 Fair value adjustment ($375000 - $360000) $15000
Net unrealized holding gain $15000
(Unrealizes gain is credited on increase in fair value of holdings and fair value recognised)
4 No Entry is required for Net Income since There is no significant influence and hence there is no associate and associatee relationship.

Assumption used in the solution

In entry number 2, it is assumed that dividend declared is related to period after the investment is done by fair company in Midlin Company.

If Dividend is declared related to period before the investment by fair company then 'Investment in Midlin company's shares' account will be credited instead of 'Dividend Income' account.

ekkarill92 answered 1 year ago
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