Ship Corporation had outstanding 100,000 common shares. On January 10, 2014, Shore Company purchased a block of these shares in the open market at $ 20 per share for long- term investment purposes. At the end of 2014, Ship reported net earnings of $ 300,000 and cash dividends of $ 0.60 per share. At December 31, 2014, Ship’s stock was selling at $ 18 per share. This problem involves two separate cases: Case A Purchase of 10,000 of Ship’s common shares. Case B Purchase of 40,000 of Ship’s common shares.
Required:
1. For each case, identify the accounting method that the company should use. Explain why.
2. For each case, in parallel columns, prepare the journal entries for each of the following (if no entry is required, explain why):
a. Acquisition.
b. Revenue recognition.
c. Dividends received.
d. Fair value effects.
3. For each case, show how the following should be reported on the 2014 financial statements:
a. Non-current investments.
b. Shareholders’ equity.
c. Investment income.