Humphrey Financial paid $495,000 for a 45% investment in the common stock of Holmes, Inc. For the first year, Holmes reported net income of $206,000 and at year-end declared and paid cash dividends of $97,000. On the balance-sheet date, the fair value of Humphrey’s investment in Holmes stock was $402,000.
1. Which method is appropriate for Humphrey Financial to use in its accounting for its investment in Holmes, Inc.? Why?
2. Show everything that Humphrey would report for the investment and any investment revenue in its year-end financial statements.