As a long-term investment, Fair Company purchased 20% of Midlin Company’s 300,00

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. 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.

Explanation / Answer

1)Assuming No significant influence

2)SIgnificant infuence

Date Account Debit credit a Available for sale securities 360000 cash 360000 [Being investment made] b securities fair value adjustment 15000 Unrealized holding gain/loss 15000 [Being unrealised gain recorded 375000-360000] c cash 75000 dividend revenue 75000 [Dividend received 300000*.25]

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