A summary of the December 31, 1995 balance sheet of Masonite Tires follows. (Long-term equity investments: the markto-market method versus the equity method) Assets $160,000 Liabilities $ 70,000 Stockholders’ equity 90,000 Total $160,000 Total $160,000 On January 1, 1996, Masonite purchased 2,000 (20 percent of the outstanding common shares) shares of Bingo Boots for $40,000 and held the investment throughout 1996 and 1997. During 1996 and 1997 Bingo earned net income of $15,000 and $20,000, respectively. Bingo paid total dividends of $10,000 and $15,000 during 1996 and 1997. The per-share prices of Bingo common stock as of the end of 1996 and 1997 were $18 and $21, respectively. Dur¬ ing 1996 and 1997 Masonite generated revenues (excluding revenues related to the investment in Bingo) of $85,000 and $75,000, respectively, and incurred expenses of $50,000 and $70,000, respectively. Assume that all these revenues and expenses involve cash. Masonite pays no dividends. REQUIRED:

a. Assume that Masonite uses the mark-to-market method and the investment in Bingo was classified as available-for-sale. (1) Prepare a balance sheet as of January 1, 1996. (2) Prepare a balance sheet as of December 31, 1996 and income statement for the year ended December 31, 1996. (3) Prepare a balance sheet as of December 31, 1997 and income statement for the year ended December 31, 1997.

b. Assume that Masonite uses the equity method. (1) Prepare a balance sheet as of January 1, 1996. (2) Prepare a balance sheet as of December 31, 1996 and income statement for the year ended December 31, 1996. (3) Prepare a balance sheet as of December 31, 1997 and income statement for the year ended December 31, 1997.

c. Identify some reasons why the management of Masonite may wish to use the mark-to-market method instead of the equity method. Describe why the equity method might be pre¬ ferred. Does holding 20 percent of a company’s outstanding common stock necessarily mean that the investor company can exert substantial influence over the investee?