E17-16.

(Fair Value and Equity Method Compared)

(LO 2, 3) Jaycie Phelps Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2017. The purchase price was $1,200,000 for 50,000 shares. Kulikowski Inc. declared and paid an $0.85 per share cash dividend on June 30 and on December 31, 2018. Kulikowski reported net income of $730,000 for 2018. The fair value of Kulikowski's stock was $27 per share at December 31, 2018.

Instructions

(a)

Prepare the journal entries for Jaycie Phelps Inc. for 2017 and 2018, assuming that Phelps cannot exercise significant influence over Kulikowski.

(b)

Prepare the journal entries for Jaycie Phelps Inc. for 2017 and 2018, assuming that Phelps can exercise significant influence over Kulikowski.

(c)

At what amount is the investment in securities reported on the balance sheet under each of these methods at December 31, 2018? What is the total net income reported in 2018 under each of these methods?