Question

As a long-term investment, Painters' Equipment Company purchased 20% of AMC Supplies Inc.'s 530,000 shares for...

As a long-term investment, Painters' Equipment Company purchased 20% of AMC Supplies Inc.'s 530,000 shares for $610,000 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 $380,000 and distributed cash dividends of 30 cents per share. At year-end, the fair value of the shares is $648,000.

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.

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Answer #1

1) Journal entry :

Date account and explanation debit credit
Investment in AMC Supplies Inc 610000
Cash 610000
(To record investment)
No entry
Cash (530000*.30) 159000
Dividend income 159000
(To record dividend)
Investment in AMC Supplies Inc 38000
Unrealized gain or loss-Income 38000
(To record fair value adjustment)

2) Journal entry :

Date account and explanation debit credit
Investment in AMC Supplies Inc 610000
Cash 610000
(To record investment)
Investment in AMC Supplies Inc (380000*20%) 76000
Income from Investment in AMC Supplies Inc 76000
(To record net income)
Cash (530000*.30) 159000
  Investment in AMC Supplies Inc 159000
(To record dividend)
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