Question

As a long-term investment, Painters' Equipment Company purchased 20% of AMC Supplies Inc.'s 590,000 shares for $670,000 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 $350,000 and distributed cash dividends of 20 cents per share. At year-end, the fair value of the shares is $714,000.

1. Assume no 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.)

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.)

Answer 1

Solution 1:

Journal Entries - Painters equipment company
Event	Particulars	Debit	Credit
1	Investment in AMC Supplies Dr	$670,000.00
	To Cash		$670,000.00
	(To record investment in AMC supplies)
2	No Journal entry required
3	Cash Dr	$23,600.00
	To Dividend revenue		$23,600.00
	(To record dividend received)
4	Fair value adjustment Dr	$44,000.00
	To Unrealized holding gain or loss - OCI		$44,000.00
	(To record adjustment to fair value)

Solution 2:

Journal Entries - Painters equipment company
Event	Particulars	Debit	Credit
1	Investment in AMC Supplies Dr	$670,000.00
	To Cash		$670,000.00
	(To record investment in AMC supplies)
2	Investment in AMC Supplies Dr	$70,000.00
	To Investment Income		$70,000.00
	(To record share of income in AMC)
3	Cash Dr	$23,600.00
	To Investment in AMC Supplies		$23,600.00
	(To record dividend received)
4	No Journal entry required