Question

Fairbanks Corporation purchased 400 shares of Sherman Inc. common stock for $13,200 (Fairbanks 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 $34.50 per share. Prepare Fairbanks' 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

(a) Dr Equity Investments (Trading) $13,200

Cr Cash $13,200

(b) Dr Cash $1,300

Cr Dividend Revenue $1,300

(c) Dr Fair Value Adjustment (Trading) $600

Cr Unrealized Holding Gain or Loss-Income $600

Step-by-step explanation:

Preparation of Fairbanks' journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment.

(a) Dr Equity Investments (Trading) $13,200

Cr Cash $13,200

(To record the purchase of the investment)

(b) Dr Cash $1,300

Cr Dividend Revenue $1,300

(400*$3.25 per share)

(To record dividends received)

(c) Dr Fair Value Adjustment (Trading) $600

Cr Unrealized Holding Gain or Loss-Income $600

[(400*$34.50 per share)-$13,200]

(To record the fair value adjustment)