Question

Buffalo Corporation purchased 380 shares of Sherman Inc. common stock for $12,900 (Buffalo 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 $37.50 per share.
Prepare Buffalo's journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment.

Answer 1

Answer:

a) Debit Share Investment $12,900 Credit Bank $12,900

b) Debit Bank $1,235 Credit Dividends Received $1,235

c) Debit Share Investment $1,350 Credit Fair Value Gain $1,350

Explanation:

Dividend received= $3.25 * 380 shares = $1,235

Fair Value Adjustment = Fair value at end - cost ( fair value at beginning )

                                     = ( $37.50 *380) - $12,900

                                     = $14,250 - $12,900

                                     = $1,350 gain

Gain because the value of the investment increases

Answer 2

Answer:

(a) the purchase of the investment

Debit: Equity Investments $12,900

Credit: Cash $12,900

(b) the dividends received

Debit: Cash $1,235

Credit: Dividend income $1,1235

(c) the fair value adjustment

Debit: Fair Value Adjustment $1,350

Credit: Unrealized Holding Gain or Loss - Gain $1,350

Explanation:

Note: See the attached to see how the following journal entries will appear in the book:

These are recorded as follows:

Buffalo Corporation

(a) the purchase of the investment

Debit: Equity Investments $12,900

Credit: Cash $12,900

Being the amount paid to purchase the common stock of Sherman Inc.

(b) the dividends received

Debit: Cash $1,235

Credit: Dividend income $1,1235

Being the amount cash dividend received from investment in Sherman Inc.

Note: Dividend received is calculated as follows:

Dividend received from Sherman Inc. = 380 × $3.25 = $1,235.

(c) the fair value adjustment

Debit: Fair Value Adjustment $1,350

Credit: Unrealized Holding Gain or Loss - Gain $1,350

Being the unrealized gain from holding the investment in Sherman Inc.

Note: The unrealized gain is calculated as follows:

Unrealized gain = [$37.50 – ($12,900/380)] × 380 = $1,350