In: Accounting
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. 2. Assume 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.
Solution 1:
Journal Entries - Fair company | |||
Event | Particulars | Debit | Credit |
1 | Investment in Midlin Company Dr | $360,000.00 | |
To Cash | $360,000.00 | ||
(To record investment in Midlin Company) | |||
2 | No Journal entry required | ||
3 | Cash Dr | $15,000.00 | |
To Dividend revenue | $15,000.00 | ||
(To record dividend received) | |||
4 | Fair value adjustment Dr | $15,000.00 | |
To Unrealized holding gain or loss - OCI | $15,000.00 | ||
(To record adjustment to fair value) |
Solution 2:
Journal Entries - Fair company | |||
Event | Particulars | Debit | Credit |
1 | Investment in Midlin Company Dr | $360,000.00 | |
To Cash | $360,000.00 | ||
(To record investment in Midlin Company) | |||
2 | Investment in Midlin Company Dr | $27,000.00 | |
To Investment Income | $27,000.00 | ||
(To record share of income in Midlin) | |||
3 | Cash Dr | $15,000.00 | |
To Investment in Midlin Company | $15,000.00 | ||
(To record dividend received) | |||
4 | No Journal entry required |