Fredo, Inc., purchased 10% of Sonny Enterprises for $1,000,000 on January 1, 2018. Sonny recognized a total of $340,000 net income during 2018, paid $24,000 of dividends to Fredo during 2018, and at December 31, 2018, the market value of the Sonny investment increased to $1,034,000. Required: Prepare the journal entries necessary to account for the Sonny investment, assuming that Fredo (1) lacks significant influence or (2) has significant influence over the operating and financial policies of the investee.
Required 1
Record the entry for investment in Sonny Enterprises.
Record the entry for cash dividend received.
Record the net unrealized holding gain or loss for an available-for-sale investment.
Required 2:
Record the entry for investment in Sonny Enterprises.
Record the revenue from Sonny Enterprise during 2018.
Record the receipt of dividend during 2018.

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andromache andromache · Answer 1 · 2020-08-06T03:07:57+02:00

Answer and Explanation:

The Journal entry is shown below:-

As per requirement 1

1. Investment in Sonny Enterprises Dr, $1,000,000

To Cash $1,000,000

(Being investment is recorded)

2. Cash Dr, $24,000

To Dividend revenue $24,000

(Being cash dividend received is recorded)

3. Fair value adjustment Dr, $34,000

To Unrealized holding gain or loss - OCI $34,000

(Being investment at fair value is recorded)

As per requirement 2

1. Investment in Sonny Enterprises Dr, $1,000,000

To Cash $1,000,000

(Being investment is recorded)

2. Investment in Sonny Enterprises Dr, $34,000

To Investment Income $34,000 ($340,000 × 10%)

(Being revenue from Sonny is recorded)

3. Cash Dr, $24,000

To Investment in Sonny Enterprises $24,000

(Being the receipt of dividend is recorded)