Gulf Coast Corporation is a successful oil and gas exploration business in the southwestern United States. At

Question:

Gulf Coast Corporation is a successful oil and gas exploration business in the southwestern United States. At the beginning of 2011, the company made investments in three companies that perform services in the oil and gas industry. The details of each of these investments follow. Gulf Coast purchased 100,000 shares of Marsh Service Corporation at a cost of $16 per share. Marsh has 1.5 million shares outstanding and during 2011 paid dividends of $0.80 per share on earnings of $1.60 per share. At the end of the year, Marsh’s shares were selling for $24 per share. Gulf Coast also purchased 2 million shares of Crescent Drilling Company at $8 per share. Crescent has 10 million shares outstanding. In 2011, Crescent paid a dividend of 0.40 per share on earnings of $0.80 per share. During the year, the president of Gulf Coast was appointed to Crescent’s board of directors. At the end of the year, Crescent’s stock was selling for $12 per share. In another action, Gulf Coast purchases 1 million shares of Logan Oil Field Supplies Company’s 5 million outstanding shares at $12 per share. The president of Gulf Coast sought membership on Logan’s board of directors but was rebuffed when a majority of shareholders stated they did not want to be associated with Gulf Coast. Logan paid a dividend of $0.80 per share and reported a net income of only $0.40 per share for the year. By the end of the year, its stock price had dropped to $4 per share.

Required

1. For each investment, make entries in journal form for

(a) Initial investment,

(b) Receipt of cash dividend, and

2. What adjusting entry (if any) is required at the end of the year?

3. Assuming that Gulf Coast sells its investment in Logan after the first of the year for $6 per share, what entry would be made?

4. Assuming no other transactions occur and that the market value of Gulf Coast’s investment in Marsh exceeds cost by $2,400,000 at the end of the second year, what adjusting entry (if any) would be required?

5. What principal factors were considered in determining how to account for Gulf Coast’s investments? Should they be shown on the balance sheet as short-term or long-term investments? What factors affect this decision?

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