Question

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As a long-term investment, Painters' Equipment Company purchased 20% of AMC Supplies Inc.'s 430,000 shares for $510,000 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 $280,000 and distributed cash dividends of 15 cents per share. At year-end, the fair value of the shares is $538,000.

Required:
1. Assume no significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year.

Answer 1

Answer
1)
S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
1	Investment in AMC Supplies shares	$     510,000
	Cash		$      510,000
	(To record the purchase of investment )
2	Cash	$       12,900
	Investment revenue (430,000 shares*20%*0.15)		$        12,900
	(To record the dividend received)
3	Fair value adjustment	$       28,000
	Net unrealized holding gains and losses (538,000-510,000)		$        28,000
	(To record the adjusting entry )
* No entry is required for net income in AMC supplies.