Question 3

Santa Company purchased 2,000 of the 10,000 outstanding shares of Elves Companys common

stock for $60,000 on January 1, 2010. During 2010, Elves Company reported a dividend of $5 per

share and net income of $75,000. At the end of 2010 the market value of a share of Elves

Companys stock has increased to $32 per share.

(a) If Santa Company accounts for the investment as a minority, passive and classifies the

investment as an available-for-sale investment, then Santa Company will recognize what amount

of 2010 income from the investment that contributes to net income?

(b) If Santa Company accounts for the investment as a minority, passive investment and classifies

it as an available-for-sale security, then the investment will appear in the December 31, 2010

balance sheet at what amount?

(c) If Santa Company accounts for the investment as a minority, active investment and uses the

equity method to account for the investment, then Santa Company will recognize what amount of 2010 income from the investment that contributes to net income?

(d) If Santa Company accounts for the investment as a minority, active investment and uses the

equity method to account for the investment, then the investment will appear in the December 31,

2010 balance sheet at what amount?