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.

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