On July 1, 2008, Dynamic Company purchased for cash 40 percent of the outstanding capital stock of Cart Company. Both Dynamic and Cart have a December 31 year-end. Cart, whose common stock is actively traded in the over-the-counter market, reported its total net income for the year to Dynamic and also paid cash dividends on November 15, 2008, to Dynamic and its other stockholders.

Required:

a. How should Dynamic report the foregoing facts in its December 31, 2008, balance sheet and its income statement for the year then ended? Discuss the rationale for your answer.

b. If Dynamic should elect to report their investment at fair value, how would its balance sheet and income statement differ from your answer to a?