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25 August, 06:46

As a long-term investment, Painters' Equipment Company purchased 25% of AMC Supplies Inc.'s 500,000 shares for $580,000 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 $350,000 and distributed cash dividends of 25 cents per share. At year-end, the fair value of the shares is $615,000. Required: 1. Assume no significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year. 2. Assume significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year.

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  1. 25 August, 07:07
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    A. Journal entries

    (1)

    Dr Investment in AMC common shares

    $580,000

    Cr Cash $580,000

    (2) No journal entry required

    (3) Dr Cash $31,250

    Cr Investment Revenue $31,250

    (4) Dr Fair value adjustment

    $35,000

    Cr Net unrealised holding gains and losses - OCI $35,000

    (B.) Journal entries

    Dr Investment in AMC common shares $580,000

    Cr Cash $580,000

    (2) Investment in AMC common shares

    Dr $87,500

    Cr Investment Revenue $87,500

    (3) Dr Cash $31,250

    Cr Investment in AMC common shares $31,250

    (4) No journal entry required

    Explanation:

    A. Journal entries

    (1)

    Dr Investment in AMC common shares

    $580,000

    Cr Cash $580,000

    (2) No journal entry required

    (3) Dr Cash $31,250

    Cr Investment Revenue $31,250

    (4) Dr Fair value adjustment

    $35,000

    Cr Net unrealised holding gains and losses - OCI $35,000

    Working notes:

    Cash Dividends = 25%*500,000*$0.25 = $31,250

    Adjustment entry:

    Fair value adjustment = 580,000-615,000 = $35,000

    B.) Journal entries:

    (1)

    Dr Investment in AMC common shares $580,000

    Cr Cash $580,000

    (2) Investment in AMC common shares

    Dr $87,500

    Cr Investment Revenue $87,500

    (3) Dr Cash $31,250

    Cr Investment in AMC common shares $31,250

    (4) No journal entry required

    Working notes:

    Net Income:

    Investment in AMC common shares = 25%*350,000 = $87,500

    Cash Dividends = 25%*500,000*$0.25 = $31,250
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