Bart Company had outstanding 30,000 shares of common stock, par value $10 per share. On January 1, 2013, Homer Company purchased some of these shares at $25 per share, with the intent of holding them for a long time. At the end of 2013, Bart Company reported the following: net income, $50,000, and cash dividends declared and paid during the year, $25,500. The fair value of Bart Company stock at the end of 2013 was $22 per share.
Required:
1. This problem involves two separate cases. For each case (shown in the table), identify the method of accounting that Homer Company should use. Explain why.
2. Give the journal entries for Homer Company at the dates indicated for each of the two independent cases. If no entry is required, explain why. Use the following format:
Case A: 3,600 Shares Purchased Case B: 10,500 Shares Purchased
1. Accounting method?
2. Journal entries made by Homer Company:
a. To record the acquisition of Bart Company at January 1, 2013.
b. To recognize the income reported by Bart Company for 2013.
c. To recognize the dividends declared and paid by Bart Company.
d. Entry to recognize the fair value adjustment at end of 2013.
3. Complete the following schedule to show the separate amounts that should be reported on the 2013 financial statements of Homer Company:
Dollar Amounts
Case A Case B
Balance sheet
Investments
Stockholders' Equity
Income statement
Dividend Revenue
Equity in Affliate Earnings
4. Explain why the assets, stockholders' equity, and income statements for the two cases differ.