Surge Corporation had outstanding 120,000 shares of no-par common stock. On January 10, 2014, Crash Company purchased a block of these shares in the open market at $25 per share for long-term investment purposes. At the end of 2014, Surge reported net income of $175,000 and cash dividends of $1.00 per share.
At December 31, 2014, Surge stock was selling at $23 per share. This problem involves two separate cases:
Case A: Purchase of 15,000 shares of Surge common stock.
Case B: Purchase of 48,000 shares of Surge common stock.
1. For each case, identify the accounting method that the company should use. Explain why.
2. For each case, in parallel columns, give the journal entries for each of the following (if no entry is required, explain why):
b. Revenue recognition.
c. Dividends received.
d. Fair value effects.
3. For each case, show how the following should be reported on the 2014 financial statements:
a. Long-term investments.
b. Stockholders’ equity.
4. Explain why the amounts reported in requirement (3) are different for the two cases.