Question

Sweet Corporation purchased 360 shares of Sherman Inc. common stock for $11,900 (Sweet does not have significant influence). During the year, Sherman paid a cash dividend of $3.25 per share. At year-end, Sherman stock was selling for $37.50 per share. Prepare Sweet's journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)

Answer 1

Answer:

(a) Debit Equity Investments for $11,900; and Credit Cash for $11,900.

(b) Debit Cash for $1,170; and Credit Dividend Revenue for $1,170.

(c) Debit Fair Value Adjustment for $1,600; and Unrealized Holding Gain or Loss - Income for $1,600.

Explanation:

(a) Journal entries to record the purchase of the investment

The journal entries will look as follows:

Accounts Title and Description               Debit ($)       Credit ($)    

Equity Investments                                   11,900

   Cash                                                                              11,900

(To record the purchase of the investment.)                                        

(b) Journal entries to record the dividends received

The journal entries will look as follows:

Accounts Title and Description               Debit ($)        Credit ($)    

Cash (w.1)                                                      1,170

Dividend Revenue                                                                1,170

(To record the dividends received.)                                                      

(c) Journal entries to record the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.

The journal entries will look as follows:

Accounts Title and Description                   Debit ($)        Credit ($)    

Fair Value Adjustment (w.2)                            1,600

Unrealized Holding Gain or Loss - Income                          1,600

(To record the fair value adjustment.)                                                      

Workings:

w.1: Cash = Dividend received = Number of shares * Cash dividend per share = 360 * $3.25 = $1,170

w.2: Fair Value Adjustment = Fair value - Common stock purchase cost = (Number of shares * Selling price per share) - Common stock purchase cost = (360 * $37.50) - $11,900 = $1,600