Question

As a long-term investment, Painters' Equipment Company purchased 25% of AMC Supplies Inc.'s 490.000 shares for $570,000 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 $340,000 and distributed cash dividends of 20 cents per share. At year-end, the fair value of the shares is $604,000 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

Ans:

Solution:(1): Following is the required journal entries:

Particulars	Debit($)	Credit ($)
(1) Investment in AMC common shares	570,000
Cash		570,000
(2) No journal entry required
(3) Cash	24,500
Investment Revenue		24,500
(4) Fair value adjustment	34,000
Net unrealised holding gains and losses- OCI		34,000

Working notes:

Cash Dividends = 25%*490,000*$0.20 = $24,500

Adjustment entry:

Fair value adjustment = 570,000-604,000 = $34,000

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

Particulars	Debit($)	Credit($)
(1) Investment in AMC common shares	570,000
Cash		570,000
(2) Investment in AMC common shares	85,000
Investment Revenue		85,000
(3) Cash	24,500
Investment in AMC common shares		24,500
(4) No journal entry required

Working notes:

Net Income:

Investment in AMC common shares = 25%*340000

= $85,000

Cash Dividends = 25%*490,000*$0.20 = $24,500