Reporting Passive Investments (P12-4)
During January 2011, Pentagon Company purchased 12,000 shares of the 200,000 outstanding common shares (no-par value) of Square Corporation at $25 per share. This block of stock was purchased as a long-term investment. Assume that the accounting period for each company ends December 31. Subsequent to acquisition, the following data were available:
| 2011 | 2012 |
Income reported by Square Corporation at December 31 | $40,000 | $60,000 |
Cash dividends declared and paid by Square Corporation |
|
|
during the year | $60,000 | $80,000 |
Market price per share of Square common stock on |
|
|
December 31 | $ 28 | $ 27 |
Required:
1. What accounting method should Pentagon Company use? Why?
2. Give the journal entries for the company for each year (use parallel columns) for the following (if none, explain why):
a. Acquisition of Square Corporation stock.
b. Net income reported by Square Corporation.
c. Dividends received from Square Corporation.
d. Fair value effects at year-end.
3. For each year, show how the following amounts should be reported on the financial statements:
a. Long-term investments.
b. Stockholders’ equity—net unrealized loss/gain.
c. Revenues
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