As a long-term investment, Painters\' Equipment Company purchased 20% of AMC Sup

Question

As a long-term investment, Painters' Equipment Company purchased 20% of AMC Supplies Inc.'s 480,000 shares for $560,000 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 $330,000 and distributed cash dividends of 25 cents per share. At year-end, the fair value of the shares is $593,000.

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.

Explanation / Answer

SOLUTION

(A) Assume no significant influence was acquired.

(B) Assume significant influence was acquired.

S.No. Account titles and Explanation Debit ($) Credit ($) 1. Investment in AMC common shares 560,000 Cash 560,000 2. No journal entry required 3. Cash 24,000 Investment revenue (480,000 shares * 20% * $0.25) 24,000 4. Fair value adjustment ($560,000 - $593,000) 33,000 Net unrealized holding gains and losses- OCI 33,000

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