As a long-term investment, Painters\' Equipment Company purchased 25% of AMC Sup

Question

As a long-term investment, Painters' Equipment Company purchased 25% of AMC Supplies Inc.'s 520,000 shares for $600,000 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 $370,000 and distributed cash dividends of 25 cents per share. At year-end, the fair value of the shares is $637,000.

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

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

Working notes:

Cash Dividends = 25%*520000*$0.25 = $32,500

Adjustment entry:

Fair value adjustment = 600000-637000 = $37,000

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

Working notes:

Net Income:

Investment in AMC common shares = 25%*370000

= $92,500

Cash Dividends = 25%*520000*$0.25 = $32,500

Particulars Debit($) Credit ($) (1) Investment in AMC common shares 600,000 Cash 600,000 (2) No journal entry required (3) Cash 32,500 Investment Revenue 32,500 (4) Fair value adjustment 37,000 Net unrealised holding gains and losses- OCI 37,000

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