On January 1, Company P purchased 40 percent of the voting stock of Company S for $600,000 cash. Company P exercises significant influence over Company S. During the year, Company S had net income of $300,000 and declared and paid dividends of $100,000. What accounting method should Company P use to record this investment? Why? Show how Company P would account for this investment on January 1, and for the subsequent income and dividends of Company S, using journal entries. Show the explanations of the journal entries and your calculations. How would the investment appear on Company P’s books as of December 31?
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