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Fredo, Inc., purchased 10% of Sonny Enterprises for $1,000,000 on January 1, 2018. Sonny recognized a...

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Accounting

Fredo, Inc., purchased 10% of Sonny Enterprises for $1,000,000on January 1, 2018. Sonny recognized a total of $340,000 net incomeduring 2018, paid $24,000 of dividends to Fredo during 2018, and atDecember 31, 2018, the market value of the Sonny investmentincreased to $1,034,000. Required: Prepare the journal entriesnecessary to account for the Sonny investment, assuming that Fredo(1) lacks significant influence or (2) has significant influenceover 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 anavailable-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.

Answer & Explanation Solved by verified expert
3.6 Ratings (675 Votes)

Solution 1:

Journal Entries - Fredo Inc.
Event Particulars Debit Credit
1 Investment in Sonny Enterprises Dr $1,000,000.00
      To Cash $1,000,000.00
(To record investment purchased)
2 Cash Dr $24,000.00
      To Dividend revenue $24,000.00
(To record dividend received)
3 Fair value adjustment Dr $34,000.00
      To Unrealized holding gain or loss - OCI $34,000.00
(Being adjusting entry to record investment at fair value)

Solution 2:

Journal Entries - Fredo Inc.
Event Particulars Debit Credit
1 Investment in Sonny Enterprises Dr $1,000,000.00
      To Cash $1,000,000.00
(To record investment purchased)
2 Investment in Sonny Enterprises Dr $34,000.00
      To Investment Income ($340,000*10%) $34,000.00
(To record share of income in Sonny)
3 Cash Dr $24,000.00
      To Investment in Sonny Enterprises $24,000.00
(To record dividend received)

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