During January 2012, Danbury, Inc., acquired 40,000 shares of Ernst Corporation common stock for $24 per share.

Question:

During January 2012, Danbury, Inc., acquired 40,000 shares of Ernst Corporation common stock for $24 per share. In addition, it purchased 5,000 shares of Tsao Corporation preferred (nonvoting) stock for $112 per share. Ernst has 160,000 shares of common stock outstanding, and Tsao has 12,000 shares of nonvoting stock outstanding. Danbury anticipates holding both securities for at least five years. The following data were obtained from operations during 2012:

2012

Net income:

Ernst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $190,000

Tsao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000

Dividends paid (per share):

Ernst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.60

Tsao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.50

Market value per share at December 31:

Ernst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25

Tsao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

Required:

1. Interpretive Question: What method should Danbury use in accounting for the investment in Ersnt stock? Why? What accounting method should be used in accounting for Tsao nonvoting stock? Why?

2. Prepare the journal entries necessary to record the transactions for 2012.

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... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...