Recording and Reporting an Equity Method Investment
Gioia Company acquired some of the 65,000 shares of outstanding common stock (no par) of Tristezza Corporation during 2011 as a long-term investment. The annual accounting period for both companies ends December 31. The following transactions occurred during 2011:
Jan. 10 | Purchased 17,875 shares of Tristezza common stock at $11 per share. |
Dec. 31 | a. Received the 2011 financial statements of Tristezza Corporation that reported net income of $80,000. b. Tristezza Corporation declared and paid a cash dividend of $0.60per share. c. Determinedthe market price of Tristezza stock to be$10 per share. |
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Required:
1. What accounting method should the company use? Why?
2. Give the journal entries for each of these transactions. If no entry is required, explain why.
3. Show how the long-term investment and the related revenue should be reported on the 2011 financial statements (balance sheet and income statement) of the Gioia Company.
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