1. Fill in the dollar changes (amount of increase or decrease) caused in the Investment account and Dividend Revenue or Investment Income (Revenue) account by each of the following transactions, assuming the Sun Company uses (a) the fair value method and (b) the equity method for accounting for its investment in the Moon Company. (40 pts) (b) Equity Method Investment Dividend Account Revenue (a) Fair Value method Investment Dividend Account Revenue Transaction 1) At the beginning of Year 1, Sun Bought 30% of Moon's common stock at its book value, $1,600,000 2) During Year 1, Moon reported $80,000 of net income and paid $40,000 of dividends. 3) During Year 2, Moon reported $30,000 of net income and paid $40,000 of dividends. 4) During Year 3, Moon reported a net loss of $20,000 and paid $8,000 of dividends. 5) Indicate the Year 3 ending balances in the Investment account and cumulative totals for Year 1, 2, and 3 for dividend revenue and investment income (revenue). II. Star Company has the following securities in its potfolio of trading securities on December 31, 2018: Cost Fair Value Mercury Corp., Common 10,000 shares $ 320,000 $ 278,000 Venus Corp., Common, 20,000 shares 360,000 370,000 Jupiter Corp., Common, 4,000 shares 104.000 105,200 $ 784,000 $ 753,200 All the securities had been purchased in 2018. In 2019, the following transactions occured: March 5 fees Sold 10,000 shares of Mercury Corp., Common at $30 per share, less $1,000 April 7 Bought 600 shares of World Corp., Common at $90 plus brokerage commission of $1,100 August 10 Sold 4,000 Jupiter Corp shares at $36 per share, less $2,000 fees. Trading equity securities portfolio of Star Company was as follows on December 31, 2019: Cost Fair Value Venus Corp., Common, 20,000 shares $360,000 $ 397,000 World Corp.. Common, 600 shares 55,100 51,000 $ 415,100 $ 448,000 Required: Prepare the following journal entries a. The 2018 adjusting entry. b. The sale of Mercury Corp. stock. c. The purchase of World Corp. stock. d. The sale of Jupiter Corp. stock. e. The 2019 adjusting entry. (40 pts) III. Nick Earnst is the 52% owner of the outstanding stock of Real Company. As the founder and president of the company, Nick believes that it is the right time to develop some new and promising products. He intends to finance the research and development costs through issuance of debt. However, the other principal shareholder, David Green, who owns 40% of the stock doesn't agree with him. The company has already got a considerable amount of debt, and David is concerned that additional debt may be dangerous in terms of bankruptcy. He claims that the company should be financed by issuance of stock. Nick, on the other hand, tries to avoid a stock issuance because he's that it will dilute his controlling interest Required: a. Define who the stakeholders are in this situation and discuss the ethical issues regarding this case. b. How would you act if you were Nick? (20 pts)
