Question

As a long-term investment, Painters' Equipment Company purchased 25% of AMC Supplies Inc.'s 490,000 shares for $570,000 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 $340,000 and distributed cash dividends of 20 cents per share. At year-end, the fair value of the shares is $604,000.Required:a) Assume no significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year.Event 1 Record the purchase of AMC Supplies shares for $570,000 as a long-term investment.Event 2 Record Painters' Equipment's share of AMC Supplies' $340,000 net income.Event 3 Record the cash dividend of 20 cents per share.Event 4 Record any necessary year-end adjusting journal entry when the fair value of the shares held are $604,000 at year-end.

Answer 1

Answer:

Event 1: To record the purchase of AMC Supplies shares for $570,000 as a long-term investment:

Dr Investment on AMC supplies shares                 570,000

Cr Cash                                                                     570,000

Event 2: To record Painters' Equipment's share of AMC Supplies' $340,000 net income: As no significant influence was acquired, no entry needed for this event.

Event 3: To record the cash dividend of 20 cents per share:

Dr Cash                       24,500

Cr Investment on AMC supplies shares       24,500

( to record dividend from AMC shares calculated as number of share owned x dividend paid per share = (25% x 490,000) x 0.2 = $24,500)

Event 4: To record any necessary year-end adjusting journal entry when the fair value of the shares held are $604,000 at year-end.

Dr Investment on AMC supplies shares              34,000

Cr Unrealized gain on investment                      34,000

(calculated as $604,000 - $570,000 =$34,000)

Explanation:

Explanations are given under each event.