E 12–14: Investment securities and equity method investments compared LO12–3, LO
ID: 2453411 • Letter: E
Question
E 12–14: Investment securities and equity method investments compared LO12–3, LO12–4, LO12–5
As a long-term investment, Painters’ Equipment Company purchased 20% of AMC Supplies Inc.’s 400,000 shares for $480,000 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 $250,000 and distributed cash dividends of 25 cents per share. At year-end, the fair value of the shares is $505,000.
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.
Explanation / Answer
Answer:1 Assume no significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year.
Because this is a long-term investment, it would be classified as Available for Sale.
Investment in AMC shares A/C Dr. $480000
To cash A/C $480000
(To record the purchase)
Cash A/C Dr. $20000 [20% x ($0.25 x 400,000)]
To Investment (or Dividend) Revenue A/C $20000
(to record the receipt of the dividend)
Fair value adjustment A/C Dr. $25000 (505,000 – 480,000)
To Net unrealized holding gain/loss-OCI A/C $25,000
(to recognize fair value)
No entry related to Net Income of AMC.
Answer:2 Assume significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year.
Investment in AMC shares A/C Dr. $480000
To cash A/C $480000
(To record the purchase)
Cash A/C Dr. $20000 [20% x ($0.25 x 400,000)]
To Investment in AMC shares A/C $20000
(to record the receipt of the dividend)
Investment in AMC shares A/C Dr. $50000 (250000*20%)
To Investment revenue A/C $50,000
(to recognize investor’s share of AMC net income)
No entry related to fair values.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.