Bart Company had 30,000 outstanding common shares for $10 per share. On January 1, 2017, Homer Company purchased some of these shares at $25 per share, with the intent of holding them for a long time. At the end of 2017, Bart Company reported the following: net income, $50,000, and cash dividends declared and paid during the year, $25,500. The market value of Bart Company shares at the end of 2017 was $22 per share.

Required:

1. This problem involves two separate cases. For each case (shown in the table below), identify the method of accounting that Homer Company should use. Explain why.

TIP: Divide the number of shares purchased by the number outstanding to determine the percentage of ownership.

2. Give the journal entries for Homer Company at the dates indicated for each of the two independent cases. If no entry is required, explain why. Use the following format:

3. Complete the following schedule to show the separate amounts that should be reported on the 2017 financial statements of Homer Company:

4. Explain why assets and investment income for the two cases are different.

Transcribed Image Text:

Case A: 3,600 Shares Purchased Case B: 10,500 Shares Purchased Journal entries made by Homer Company: a. To record the acquisition of Bart Company at January 1, 2017. b. To recognize the income reported by Bart Company for 2017. C. c. To recognize the dividends declared and paid by Bart Company. d. Entry to recognize the market value effect at end of 2017. Dollar Amounts Case A Case B Balance sheet Investments Income Statement Investment Income Gain on Investments Equity in Investee Earnings