As a long-term investment, Painters’ Equipment Company purchased 20% of AMC Supp

Question

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

1 Answer:- Assuming no significant influence was acquired

2. ANSWER :- Assuming Significant Influence was acquired

Explanation :-

1. Dividends:- Cash - (25% × 400000 shares × 0.20) =$ 20000

Adjustment entry:- Fair Value Adjustment =(505000 - 480000) = $25000

2. Net Income :- Investment in AMC Common shares = (25%×250000) = $62500

Dividends :- Cash (30% × 400000 shares × 0.20) = $20000

Event Particulars Debit Credit 1 Investment in AMC Common share 480000 Cash 480000 2 No Journal Entry is required 3 Cash 20000 Investment Reserve 20000 4 Fair Value Adjustment 25000 Net unrealized holding gains and loses - OCI 25000

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