Question

On January 2, 2013, Sanborn Tobacco, Inc., bought 5% of Jackson Industry's capital stock for $90 million as a temporary investment. Sanborn realized that these securities normally would be classified as available-for-sale, but elected the fair value option to account for the investment. Jackson Industry's net income for the year ended December 31, 2013, was $120 million. The fair value of the shares held by Sanborn was $98 million at December 31, 2013. During 2013, Jackson declared a dividend of $60 million.

Required:
1. Would this investment be classified on Sanborn's balance sheet as held-to-maturity securities, trading securities, available-for-sale securities, significant-influence investments, or other? Explain.
2. Prepare all appropriate journal entries related to the investment during 2013.
3. Indicate the effect of this investment on 2013 income before taxes.



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  • CreatedDecember 23, 2013
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