Connect Access Card for Financial Accounting
Connect Access Card for Financial Accounting
9th Edition
ISBN: 9781259738678
Author: Robert Libby, Patricia Libby, Frank Hodge Ch
Publisher: McGraw-Hill Education
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Chapter A, Problem 3AP

Reporting Passive Investments

During January 2017, 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:

2017 2018
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. 1. What accounting method should Pentagon Company use? Why?
  2. 2. Give the journal entries for the company for each year (use parallel columns) for the following (if none, explain why):
    1. a. Acquisition of Square Corporation stock.
    2. b. Net income reported by Square Corporation.
    3. c. Dividends received from Square Corporation.
    4. d. Fair value effects at year-end.
  3. 3. For each year, show how the following amounts should be reported on the financial statements:
    1. a. Long-term investments.
    2. b. Stockholders’ equity—net unrealized loss/gain.
    3. c. Revenues.
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Connect Access Card for Financial Accounting

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