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

Question:

Karas Gas Corporation is a successful oil and gas exploration business in the southwestern United States. At the beginning of 2010, the company made investments in three companies that perform services in the oil and gas industry. The details of each of these investments follow.

Karas Gas purchased 200,000 shares of Shore Service Corporation at a cost of $16 per share. Shore has 3 million shares outstanding and during 2010 paid dividends of $0.80 per share on earnings of $1.60 per share. At the end of the year, Shore’s shares were selling for $24 per share.

Karas Gas also purchased 4 million shares of Speed Drilling Company at $8 per share. Speed has 20 million shares outstanding. In 2010, Speed paid a dividend of $0.40 per share on earnings of $0.80 per share. During the year, the president of Karas Gas was appointed to Speed’s board of directors. At the end of the year, Speed’s stock was selling for $12 per share.

In another action, Karas Gas purchased 2 million shares of Tom Oil Field Supplies Company’s 10 million outstanding shares at $12 per share. The president of Karas Gas sought membership on Tom’s board of directors but was rebuffed when a majority of shareholders stated they did not want to be associated with Karas Gas. Tom 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 (c) recognition of income (if appropriate).

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

3. Assuming that Karas Gas sells its investment in Tom after the first of the year for $6 per share, what journal entry would be made?

4. Assuming no other transactions occur and that the market value of Karas Gas’s investment in Shore exceeds cost by $4,800,000 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 Karas Gas’s investments? Should they be shown on the balance sheet as shortterm or long-term investments? What factors affect this decision?

Balance Sheet
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