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.
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Step by Step Answer:
Accounting concepts and applications
ISBN: 978-0538745482
11th Edition
Authors: Albrecht Stice, Stice Swain