Question

As a long-term investment, Painters' Equipment Company purchased 25% of AMC Supplies Inc.'s 520,000 shares for $600,000 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 $370,000 and distributed cash dividends of 25 cents per share. At year-end, the fair value of the shares is $637,000.

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): Following is the required journal entries:

Particulars	Debit($)	Credit ($)
(1) Investment in AMC common shares	600,000
Cash		600,000
(2) No journal entry required
(3) Cash	32,500
Investment Revenue		32,500
(4) Fair value adjustment	37,000
Net unrealised holding gains and losses- OCI		37,000

Working notes:

Cash Dividends = 25%*520000*$0.25 = $32,500

Adjustment entry:

Fair value adjustment = 600000-637000 = $37,000

Solution:(2): Following is the required journal entries:

Particulars	Debit($)	Credit($)
(1) Investment in AMC common shares	600,000
Cash		600,000
(2) Investment in AMC common shares	92,500
Investment Revenue		92,500
(3) Cash	32,500
Investment in AMC common shares		32,500
(4) No journal entry required

Working notes:

Net Income:

Investment in AMC common shares = 25%*370000

= $92,500

Cash Dividends = 25%*520000*$0.25 = $32,500