Margaret Joyce is the owner of Trickle Music Holdings Ltd., a newly formed company whose year end is December 31. The company made two investments during the first week of January 2017. Both investments are to be held for at least the next five years as investments. Information about each of the investments follows:
a. Trickle Music Holdings Ltd. purchased 30 percent of the common shares of Old Times Ltd. for its book value of $600,000. During the year ended December 31, 2017, Old Times Ltd. earned $240,000 and paid a total dividend of $150,000.
b. Trickle Music Holdings Ltd. purchased 10 percent of the common shares of Mountain Music Inc. for its book value of $150,000. During the year ended December 31, 2017, Mountain Music Inc. paid Trickle Music Holdings Ltd. a dividend of $10,000. Mountain Music Inc. earned a profit of $225,000 for that period. The market value of Trickle Music Holdings Ltd.'s investment in Mountain Music Inc. was $204,000 at December 31, 2017.
Joyce has come to you as her auditor to ask you how to account for the investments. Trickle Music Holdings Ltd. has never had such investments before. You attempt to explain the proper accounting to her by indicating that different accounting methods apply to different situations.
Required
Help Joyce understand by:
1. Describing the methods of accounting applicable to investments such as these.
2. Identifying which method should be used to account for the investments in Old Times Ltd. and Mountain Music Inc.