Jacob Corporation paid $ 536,200 for a 30% share of Gardner Enterprises on January 1 of the current year. Gardner reported net income of $ 224,000 and declared and paid cash dividends of $ 182,000 during the current year. At the time of acquisition, the book value of Gardner’s net assets equaled its market value. Finally, Gardner’s common shares are valued at $ 1,737,667 at the end of the current year.
Required
a. Prepare all journal entries indicated on the books of the Jacob Corporation under the fair value option and equity methods.
b. Assume that Jacob sells the investment for $ 540,000 at the beginning of the next year. Prepare the journal entries required to record the sale of the investment under both the fair value option and the equity methods.
c. Prepare a schedule that compares the amount and timing of revenue recognition for the fair value option and the equity methods.