(Learning Objective 1, 2: Reporting investments on the balance sheet and the related revenue on the income statement) Homestead Financial Corporation owns numerous investments in the stock of other companies. Homestead Financial completed the following long term investment transactions:
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20X4 |
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May 1 |
Purchased 8,000 shares, which make up 25% of the common stock of Mars Company at total cost of $450,000. |
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Sep. 15 |
Received a cash dividend of $1.40 per share on the Mars investment. |
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Oct. 12 |
Purchased 1,000 shares of Mercury Corporation common stock as an available for sale investment paying $22.50 per share. |
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Dec. 14 |
Received a cash dividend of $0.75 per share on the Mercury investment. |
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31 |
Received annual report from Mars Company. Net income for the year was $350,000. |
At year end the current market value of the Mercury stock is $19,200. The market value of the Mars stock is $740,000.
Required
1. For which investment is current market value used in the accounting? Why is market value used for 1 investment and not the other?
2. Show what Homestead Financial will report on its year end balance sheet and income statement for these investments. (It is helpful to use a T account for the Long Term Investment in Mars Stock account.) Ignore income tax.