As a long-term investment at the beginning of the fiscal year, Florists Internat

Question

As a long-term investment at the beginning of the fiscal year, Florists International purchased 40% of Nursery Supplies Inc.’s 6 million shares for $50 million. The fair value and book value of the shares were the same at that time. The company realizes that this investment typically would be accounted for under the equity method, but instead chooses the fair value option. During the year, Nursery Supplies earned net income of $30 million and distributed cash dividends of $1.25 per share. At the end of the year, the fair value of the shares is $46 million.

Prepare all appropriate journal entries related to the investment during 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions, (i.e., 10,000,000 should be entered as 10).)

1. Record the purchase.

2.Record the net income.

3.Record the dividends.

4.Record the adjusting entry

Explanation / Answer

1. Investment be classified on Florists balance sheet = Held-to-maturity security

2. all appropriate journal entries related to the investment during 2016=

1. PURCHASE

Debit Investment in Nursery Supplies   $50 million

Credit cash                           $ 50 million

2. NET INCOME

Debit    Cash     $12 million

Credit   Net income receivable   $12 million

3. DIVIDEND

Debit    Cash     $7.5 million

Credit    Dividend receivable    7.5 million

4. ADJUSTING ENTRY

Debit Fair value adjustment account $4 million

Credit Investment in nursery supplies    $ 4 million

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