(Comparison of equity and cost methods of accounting, LO 2, 3) On January 1, 2005 Fletwode Corp. (Fletwode) purchased 2,250,000 common shares of Irvine Ltd. (Irvine) for $10,000,000. The investment represents a 30% interest in Irvine and gives Fletwode significant influence over Irvine. During 2005 Irvine reported net income of $1,300,000 and paid dividends of $0.10 per share. No adjustments to Irvine’s net income for fair value adjustments, intercompany transactions, or goodwill are required. Both companies have December 31 year ends.

Required:

a. Prepare the journal entry that Fletwode would make to record its investment in Irvine.

b. What amount would be reported on Fletwode’s December 31, 2005 balance sheet for its investment in Irvine? How much would Fletwode report on its December 31, 2005 income statement from its investment in Irvine?

c. Suppose Fletwode used the cost method to account for its investment in Fletwode. What amounts would be reported on its December 31, 2005 balance sheet and income statement?