During its fiscal year, Company P purchased 50,000 shares of voting stock of Company S for $1,000,000. Company S has 312,500 shares of voting stock outstanding. Company S had a profit of $156,250 for the current year. Both companies have the same fiscal year. Company S paid dividends of $0.50 per share during the year. What accounting method should be used by Company P to account for this investment and why? Show the journal entries with explanations to record the original investment and make any adjustments necessary for Company S’s profits and dividends.
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