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

To account for the investment in AMC supplies Inc., Painters' Equipment Company would record the initial purchase, its share of net income, dividends received, and any fair value adjustments if relevant accounting standards permit and the fair value method has been elected for this investment.

Step-by-step explanation:

When Painters' Equipment Company purchases 25% of AMC Supplies Inc.'s shares, these are the steps to record the transactions:

1. Record the purchase of 25% of AMC's shares: Debit Investment in AMC Supplies Inc. $570,000; Credit Cash $570,000.
2. Record the share of AMC's net income: Debit Investment in AMC Supplies Inc. $85,000 (25% of $340,000); Credit Investment Revenue $85,000.
3. Record the dividend: 490,000 shares x $0.20/share = $98,000 total dividends; Painters' share is 25% of $98,000, which is $24,500. Debit Cash $24,500; Credit Dividend Revenue $24,500.
4. At year-end, no adjustment is necessary for the fair value change since no significant influence was obtained and the investment shall be accounted for using the cost method or possibly the fair value method, depending on the categorization of the investment under relevant accounting standards. However, if we assume a fair value method is permissible and has been elected, the adjusting entry would adjust the investment to its fair value: Debit Fair Value Adjustment $34,000; Credit Unrealized Gain on Investments $34,000.