Arbor Company had 200,000 outstanding shares of common stock, par value $1 per share. On January
10 of the current year, Cardinal Corporation purchased some of Arbor’s shares as a long-term investment
at $12 per share. At the end of the current year, Arbor reported the following: income, $90,000, and cash
dividends declared and paid during the year, $15,000. The fair value of Arbor Company stock at the end
of the current year was $14 per share.
Required:
1. For both of the following cases (Case A and Case B, shown in the tabulation), identify the method of
accounting that Cardinal Corporation should use. Explain why.
2. Give the journal entries for Cardinal Corporation at the dates indicated for each of the two independent
cases (Case A and Case B), assuming that the investments will be held long term. Use the following
format:

3. Complete the following schedule to show the separate amounts that should be reported on the current
year’s financial statements of Cardinal Corporation:

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a. To record the acquisition on January 10. b. To recognize the income reported by Arbor Company for the current year. c. To recognize the dividends declared and then paid by Arbor Company (two entries). d. To recognize the fair value effect at the end of the current year. Case A: 10,000 Shares Purchased Case B: 84,000 Shares Purchased