(Investment Accounted for under the Equity Method) On July 1, 2007, Sylvia Warner Company purchased for cash 40% of the outstanding capital stock of Robert Graves Company. Both Sylvia Warner Company and Robert Graves Company have a December 31 year-end. Graves Company, whose common stock is actively traded in the over-the-counter market, reported its total net income for the year to Warner Company and also paid cash dividends on November 15, 2007, to Warner Company and its other stockholders.

Instructions How should Warner Company report the above facts in its December 31, 2007, balance sheet and its income statement for the year then ended? Discuss the rationale for your answer.