Question

Exercise 12-19 Investment securities and equity method investments compared [LO12-5, 12-6]

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.

Answer 1

Solution 1:

Painters' Equipment Company
No Significant Influence
S. no.	Account titles	Debit	Credit
1)	Investment in AMC shares	$5,60,000
	Cash		$5,60,000
2)	Cash (480000*20%*0.25)	$24,000
	Dividend Revenue		$24,000
3)	Fair Value Adjustment ($593000- $560000)	$33,000
	Unrealized Holding gain or loss- OCI		$33,000

Solution 2:

Painters' Equipment Company
Significant Influence acquired
S. no.	Account titles	Debit	Credit
1)	Investment in AMC shares	$5,60,000
	Cash		$5,60,000
2)	Cash (480000*20%*0.25)	$24,000
	Investment in AMC shares		$24,000
3)	Investment in AMC shares ($330000*20%)	$66,000
	Investment Revenue		$66,000