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Brief Exercises

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Intermediate Accounting (Kieso)
Found in: Page 610

Short Answer

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’ 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 Adjustmentaccount.)

a) The amount debited to equity investment is $13,200.

b) The amount of dividend received is $1,300.

c) The gain on the investment is $600.

See the step by step solution

Step by Step Solution

Step-by-Step Solution Step 1: Definition of common stock 

Common stock is the stock in which the dividend amount is not fixed. Theamount of dividendsfluctuate.

Step 2:  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

Step 3: Journal entry for the interest received

Date

Description

Debit

Credit

B

Cash

$1,300

Investment Revenue

$1,300

Being entry of dividend received

Step 4: 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

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