Question

As a long-term investment, Painters' Equipment Company purchased 20% 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. 2. Assume significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

  Record the purchase of AMC Supplies shares for $600,000 as a long-term investment.

Record Painters' Equipment's share of AMC Supplies' $370,000 net income.

Record the cash dividend of 25 cents per share.

Record any necessary year-end adjusting journal entry when the fair value of the shares held are $637,000 at year-end.

• Record the cash dividend of 25 cents per share.

Answer 1

Solution:

Journal entries:

Event	Accoun title and explanation	Debit	Credit
a	Investment in AMC supplies	$600,000
	Cash		$600,000
	(to record the purchase)
b	Investment in AMC supplies	$74,000
	Investment income($370,000 *20%)		$74,000
	(To record the receipt of the dividend)
c	Cash	$26,000
	Investment in AMC supplies (520,000*20%*25%)		$26,000
	(To record recognize investor's share of AMC net income)
d	No entry required for fair value
e	Cash	$26,000
	Investment in AMC supplies (520,000*20%*25%)		$26,000
	(To record recognize investor's share of AMC net income)

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