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Item 5

Fredo, Incorporated, purchased 10% of Sonny Enterprises for $1,000,000 on January 1, 2024. Sonny recognized a total of $470,000 net income during 2024, paid $37,000 of dividends to Fredo during 2024, and at December 31, 2024, the market value of the Sonny investment increased to $1,047,000.

Required:

Prepare the journal entries necessary to account for the Sonny investment, assuming that Fredo (1) does not have significant influence or (2) does have significant influence over the operating and financial policies of the investee.