Comparing the Fair Value and Equity Methods Cruise Corporation had outstanding 100,000 shares of no par common stock. On January 10, 2011, Dock Company purchased a block of these shares in the open market at $20 per share for long term investment purposes. At the end of 2011, Cruise reported net income of $280,000 and cash dividends of $0.60 per share. At December 31, 2011, Cruise stock was selling at $18 per share. This problem involves two separate cases:
Case A: Purchase of 10,000 shares of Cruise common stock.
Case B: Purchase of 40,000 shares of Cruise common stock.
1. For each case, identify the accounting method that the company should use. Explain why.
2. For each case, in parallel columns, give the journal entries for each of the following (if no entry is required, explain why):
b. Revenue recognition.
c. Dividends received.
d. Fair value effects.
3. For each case, show how the following should be reported on the 2011 financial statements:
a. Long term investments.
b. Stockholders’ equity.
4. Explain why the amounts reported in requirement (3) are different for the two cases.