Question

As a long-term investment, Painters' Equipment Company purchased 25% of AMC Supplies Inc.'s 410,000 shares for $490,000 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 $260,000 and distributed cash dividends of 20 cents per share. At year-end, the fair value of the shares is $516,000.

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.

Answer 1

	Part -1	No significant influence was acquired
		General journal	Debit ($)	Credit ($)
		Investment in AMC common shares	490,000
		Cash		490,000
		(Purchase shares)
		No journal entry required
		Cash (25%*410,000*0.2)	20,500
		Investment revenue		20,500
		(Dividend received)
		Fair value adjustment (516,000-490,000)	26,000
		Net unrealized holding gains and losses-OCI		26,000
	Part -2	Significant influence was acquired
		General journal	Debit ($)	Credit ($)
		Investment in AMC common shares	490,000
		Cash		490,000
		(Purchase shares)
		Investment in AMC common shares (260,000*25%)	65,000
		Investment revenue		65,000
		(Net income on investment recorded)
		Cash (25%*410,000*0.2)	20,500
		Investment in AMC common shares		20,500
		(Dividend received)
		No journal entry required