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Chapter 13: Q.5BE (page 658)

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鈥� 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.)

Short Answer

Expert verified
  1. The amount debited to equity investment is $13,200.
  2. The amount of dividend received is $1,300.
  3. The gain on the investment is $600.

Step by step solution

01

Definition of common stock 

Common stock is the stock in which the dividend amount is not fixed. The amount of dividends fluctuate.

02

 Journal entry of the purchase of the investment

Date

Description

Debit

Credit

A.

Equity Investment

$13,200

Cash

$13,200

Being entry to record the purchase of common stock

03

Journal entry for the interest received

Date

Description

Debit

Credit

B

Cash

$1,300

Investment Revenue

$1,300

Being entry of dividend received

04

Adjustment entry for the fair value

Date

Description

Debit

Credit

C

Investment in Equity*

$600

Gain on investment

$600

Being gained on the sale of common stock

Note:

Gain鈥夆赌�on鈥夆赌�Investment=鈥夆赌�Sale鈥�price鈥夆赌�of鈥夆赌�common鈥�stock-鈥�Purchase鈥夆赌�price鈥夆赌�of鈥�common鈥�stock=鈥�$13,800-$13,200=$600

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