Question

Fredo, Inc., purchased 10% of Sonny Enterprises for $1,000,000 on January 1, 2018. Sonny recognized a total of $340,000 net income during 2018, paid $24,000 of dividends to Fredo during 2018, and at December 31, 2018, the market value of the Sonny investment increased to $1,034,000. Required: Prepare the journal entries necessary to account for the Sonny investment, assuming that Fredo (1) lacks significant influence or (2) has significant influence over the operating and financial policies of the investee.

Required 1

Record the entry for investment in Sonny Enterprises.

Record the entry for cash dividend received.

Record the net unrealized holding gain or loss for an available-for-sale investment.

Required 2:

Record the entry for investment in Sonny Enterprises.

Record the revenue from Sonny Enterprise during 2018.

Record the receipt of dividend during 2018.

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 purchased)
2	Cash Dr	$24,000.00
	To Dividend revenue		$24,000.00
	(To record dividend received)
3	Fair value adjustment Dr	$34,000.00
	To Unrealized holding gain or loss - OCI		$34,000.00
	(Being adjusting entry to record investment at 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 purchased)
2	Investment in Sonny Enterprises Dr	$34,000.00
	To Investment Income ($340,000*10%)		$34,000.00
	(To record share of income in Sonny)
3	Cash Dr	$24,000.00
	To Investment in Sonny Enterprises		$24,000.00
	(To record dividend received)