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.

(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

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