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’ 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.)

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Step by step solution

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

Date	Description	Debit	Credit

A.	Equity Investment	$13,200
	Cash		$13,200
	Being entry to record the purchase of common stock

Date	Description	Debit	Credit

B	Cash	$1,300
	Investment Revenue		$1,300
	Being entry of dividend received

Date	Description	Debit	Credit

C	Investment in Equity*	$600
	Gain on investment		$600
	Being gained on the sale of common stock

Note:

\begin{matrix} Gain on Investment = Sale price of common stock - Purchase price of common stock \\ = $ 13, 800 - $ 13, 200 \\ = $ 600 \end{matrix}

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