Fairbanks Outdoor Equipment acquired 25% of the voting stock of Bearpaw Snowshoes for $60 million cash. In year 1, Bearpaw had a net income of $32 million and paid a cash dividend of $12 million.
1. Using the equity and the market methods, show the effects of the three transactions on the accounts of Fairbanks Outdoor Equipment. Use the balance sheet equation format. Also show the corresponding journal entries. Assume constant market value for Bearpaw.
2. Which method, equity or market, would Fairbanks use to account for its investment in Bearpaw? Explain.