On January 1, year 2, Tarmax Inc. obtained a 25% ownership in Walmax. for $650,000. During Year 2, Walmax's income statement included the following:

Income before discontinued operations $325,000

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

Net income $307,000

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

Tarmax's income statement showed the following:

Sales $780,000

Expenses 490,000

Income tax expense 117,000

Required:

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

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

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