Company T had outstanding 25,000 shares of common stock, par value $10 per share. On January 1, 2011, Company P purchased some of these shares as a long-term investment at $25 per share. At the end of 2011, Company T reported the following: income, $45,000, and cash dividends declared and paid during the year, $16,500. The fair value of Company T stock at the end of 2011 was $22 per share.

Required:

1. For each of the following cases (in the tabulation), identify the method of accounting that Company P should use. Explain why.

2. Give the journal entries for Company P at the dates indicated for each of the two independent cases, assuming that the investments will be held long term. If no entry is required, explain why. Use the following format:

                                                                                                         Case A:           Case B:

                                                                                              3,000 Shares   8,750 Shares

Tabulation of Items                                                               Purchased      Purchased

1. Accounting method?

2. Journal entries:

a. To record the acquisition at January 1, 2011.

b. To recognize the income reported by Company T for 2011.

c. To recognize the dividends declared and paid by Company T.

d. To recognize fair value effect at end of 2011.

3. Complete the following schedule to show the separate amounts that should be reported on the 2011 financial statements of Company P:

4. Explain why assets, stockholders' equity, and revenues for the two cases aredifferent.

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DOLLAR AMOUNTS Case B Case A Balance sheet Investments Stockholders' equity Income statement Dividend revenue Equity in earnings of affiliate