CMC purchased some shares of one of its suppliers, Infrared Co., as an

investment. CMC paid $140,186 for the shares. Although management plans to

hold this investment for the long-term, the company may need to sell it in the

future for liquidity purposes. Conner and Martin also think that making

investments in some of their other suppliers can be a good way to ensure quality

and consistency in the components they buy from these suppliers. Because many

of its suppliers are public companies, it should be fairly easy for CMC to buy

shares on the open market.

Conner and Martin mention that they might go so far as to buy 1015% of the

common stock of one of their main suppliers and up to 30% of the common stock

of another supplier of routers, which are a critical piece in the CMC system. They

want you to help them understand whether it makes a difference if they buy just

1015% or if they buy 30% of these suppliers' shares. Both these suppliers have

been around for awhile, and with very few exceptions, the parts ordered from

them have been of high quality and delivered on time; Conner and Martin tell

you that if they do buy these stocks, they anticipate holding them for a long time

Use the investment in Infrared Co. to illustrate the accounting and financial

reporting implications of an equity investment in a supplier. While the

growth prospects for Infrared are quite good, in the current year it reported a

net loss of $120,000 and paid cash dividends of $24,000. The fair value of the

Infrared shares is $150,000 at year-end. Prepare journal entries for the

Infrared investment, assuming:

(a) CMC's investment represents 10% of Infrared shares.

(b) CMC's investment represents 30% of Infrared shares.

Indicate the differential effect on income between the accounting for the

conditions under assumptions (a) and (b).