As a long-term investment, Painters\' Equipment Company purchased 25% of AMC Sup
ID: 2592426 • Letter: A
Question
As a long-term investment, Painters' Equipment Company purchased 25% of AMC Supplies Inc.'s 460,000 shares for $540,000 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 $310,000 and distributed cash dividends of 20 cents per share. At year-end, the fair value of the shares is $571,000. Required: A) Assume no significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year. B) Assume significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year. Assume no significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year.
A)
Event 1 Record the purchase of AMC Supplies shares for $540,000 as a long-term investment.
Event 2 Record Painters' Equipment's share of AMC Supplies' $310,000 net income.
Event 3 Record the cash dividend of 20 cents per share.
Event 4 Record any necessary year-end adjusting journal entry when the fair value of the shares held are $571,000 at year-end.
B)
Event 1 Record the purchase of AMC Supplies shares for $540,000 as a long-term investment.
Event 2 Record Painters' Equipment's share of AMC Supplies' $310,000 net income.
Event 3 Record the cash dividend of 20 cents per share.
Event 4 Record any necessary year-end adjusting journal entry when the fair value of the shares held are $571,000 at year-end.
Explanation / Answer
Date Particulars Debit Cr. A. Assume no significant influence was acquired. Event 1 Investment in AMC common shares $540,000 To cash $540,000 Event 2 No entry is required Event 3 Cash [25% *460,000 shares * 20 cents ] 23000 To investment revenue 23000 Event 4 Fair value adjustment [ $571,000 - $540,000 ] 31000 To Net Unrealised holding gains and losses 31000 B. Assume significant influence was acquired Event 1 Investment in AMC common shares $540,000 To cash $540,000 Event 2 Investment in AMC common shares[$310,000 *25%] 77500 To investment revenue 77500 Event 3 Cash [25% *460,000 shares * 20 cents ] 23000 To Investment in AMC common shares 23000 Event 4 No entry is required to revalue in Equity method
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