On January 1, year 2, Lindt Inc. obtained a 25% ownership in Hershey Corp. for $650,000. During Year 2, Hersheys income statement included the following:

Income before discontinued operations $325,000

Discontinued operations loss (net of tax) (18,000)

Net income $307,000

Hershey paid dividends of $60,000 during the year.

Lindts income statement showed the following:

Sales $780,000

Expenses 490,000

Income tax expense 117,000

Required:

1. Assume that Lindt reports its investment using the equity method.
   1. Prepare all journal entries necessary to account for Lindts investment for year 2.
   2. Determine the correct balance in Lindts investment account at the end of year 2.
   3. Prepare an income statement for Lindt for the period year 2.

2. Assume that Lindt reports its investment using the cost method.
   1. Prepare all journal entries necessary to account for Lindts investment for year 2.
   2. Determine the correct balance in Lindts investment account at the end of year 2.
   3. Prepare an income statement for Lindt for the period year 2.

3. Which method would Lindt use if its bias is to report the highest possible return on investment? Briefly explain and show calculations.