Question

As a long-term investment at the beginning of the 2021 fiscal year, Florists International purchased 30% of Nursery Supplies Inc.'s 8 million shares of capital stock for $20 million. The fair value and book value of the shares were the same at that time. The company realizes that this investment typically would be accounted for under the equity method, but instead chooses to measure the investment at fair value. During the year, Nursery Supplies reported net income of $30 million and distributed cash dividends of $1.25 per share. At the end of the year, the fair value of the shares is $16 million. Required: 1. How would this investment be classified on Florists' balance sheet? 2. Prepare all appropriate journal entries related to the investment during 2021, under the fair value option, and in a manner similar to what Florists would use for investments in equity securities for which it does not have significant influence. Complete this question by entering your answers in the tabs below. Required 1 Required 2 How would this investment be classified on Florists' balance sheet? Classification < Required 1 Required 2 >

Required 2:

2-1. Record the purchase

2-2. Record the dividends

2-3. Record any adjusting entry needed at year-end for the change in fair value

Answer 1

1. Classification: Available-for-sale investment

2.

Transaction	Account Titles and Explanation	Debit	Credit
2-1.	Equity investments	20000000
	Cash		20000000
	(To record the purchase)
2-2.	Cash (30% x 8000000 x $1.25)	3000000
	Dividend revenue		3000000
	(To record the dividends)
2-3.	Unrealized holding gain or loss-equity	4000000
	Fair value adjustment ($20000000 - $16000000)		4000000
	(To record investment at fair value)