The following activities relate to Merrill Company during the years 2011 and 2012: 2011 Feb. 15 Merrill

Question:

The following activities relate to Merrill Company during the years 2011 and 2012:

2011

Feb. 15 Merrill purchased 10,000 shares of Hendershot Equipment stock for $40 per share.

Dec. 1 Merrill received an $0.80-per-share cash dividend from Hendershot.

31 Hendershot common stock had a closing market price of $37 per share. Hendershot’s 2011 net income was $120,000.

2012

July 1 Merrill sold all 10,000 shares of Hendershot stock for $42 per share.

Additional information: Hendershot had 50,000 shares of common stock outstanding on

January 1, 2011.

Required:

1. Prepare journal entries to record the transactions assuming:

a. The securities are classified as available-for-sale.

b. The equity method is used.

2. Show the amounts that would be reported on the financial statements of Merrill at December 31, 2011, under each assumption.

3. Interpretive Question: What is the minimum number of shares of stock that Hendershot could have outstanding in order for Merrill to use the equity method?

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial... Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...