Question

Fredo, Inc., purchased 10% of Sonny Enterprises for $1,000,000 on January 1, 2021. Sonny recognized a total of $310,000 net income during 2021, paid $21,000 of dividends to Fredo during 2021, and at December 31, 2021, the market value of the Sonny investment increased to $1,031,000.

Required:
Prepare the journal entries necessary to account for the Sonny investment, assuming that Fredo (1) does not have significant influence or (2) does have significant influence over the operating and financial policies of the investee.

Answer 1

Solution 1:

Journal Entries - Fredo Inc.
Event	Particulars	Debit	Credit
1	Investment in Sonny Enterprises Dr	$1,000,000.00
	To Cash		$1,000,000.00
	(To record investment in Sonny Enterprises)
2	No Journal entry required
3	Cash Dr	$21,000.00
	To Dividend revenue		$21,000.00
	(To record dividend received)
4	Fair value adjustment Dr	$31,000.00
	To Unrealized holding gain or loss - OCI		$31,000.00
	(To record adjustment to fair value)

Solution 2:

Journal Entries - Fredo Inc.
Event	Particulars	Debit	Credit
1	Investment in Sonny Enterprises Dr	$1,000,000.00
	To Cash		$1,000,000.00
	(To record investment in Sonny Enterprises)
2	Investment in Sonny Enterprises Dr	$31,000.00
	To Investment Income		$31,000.00
	(To record share of income in Sonny)
3	Cash Dr	$21,000.00
	To Investment in Sonny Enterprises		$21,000.00
	(To record dividend received)
4	No Journal entry required