Reporting Passive Investments 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 12/31/2014 |
$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.