Question

As a long-term investment, Fair Company purchased 20% of Midlin Company’s 300,000 shares for $360,000 at the beginning of the reporting year of both companies. During the year, Midlin earned net income of $135,000 and distributed cash dividends of $0.25 per share. At year-end, the fair value of the shares is $375,000.

1. Assume no significant influence was acquired. Record the transactions from the purchase through the end of the year, including any adjustment for the investment’s fair value, if appropriate. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

2. Assume significant influence was acquired. Record the transactions from the purchase through the end of the year, including any adjustment for the investment’s fair value, if appropriate. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

1.

Entry when there is no significant influence

Midlin company A/c. Dr. 3,60,000

To bank A/c. 3,60,000

( Being Shares purchased)

Bank a/c. Dr. 75,000

To divident income a/c 75,000

(Being dividend received)

Midlin company A/c. Dr. 15,000

To. Unearned gain. A/c. 15,000

2.

Significant influence is there

Midlin Company a/c dr 3,60,000

To bank A/c. 3,60,000

(Being shares purchased)

Midlin company a/c. Dr. 27,000

To revenue from investment in company 27,000

(being share in profit recognized)

Bank a/c. Dr. 9,000

To midlin company 9,000

(Dividend received)