Question

Novak Corporation purchased 380 shares of Sherman Inc. common stock for $12,900 (Novak 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 Novak'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

A. Dr Equity Investments (Trading)$12,900

Cr Cash $12,900

B. Dr Cash $1,235

Cr Dividend Revenue $1,235

C. Dr Fair Value Adjustment (Trading) $1,350

Cr Unrealized Holding Gain or Loss-Income $1,350

Step-by-step explanation:

A. Preparation of Novak's journal entries to record the purchase of the investment

Dr Equity Investments (Trading)$12,900

Cr Cash $12,900

B. Preparation of Novak's journal entries to record the dividends received

Dr Cash $1,235

($3.25 per share*380)

Cr Dividend Revenue $1,235

C. Preparation of Novak's journal entries to record the fair value adjustment

Dr Fair Value Adjustment (Trading) $1,350

Cr Unrealized Holding Gain or Loss-Income $1,350

[($37.50 per share*380)-$12,900]