During January 2019, Pentagon Company purchased the following securities for its long-term investment portfolio:

Square Company common stock: 12,000 shares (200,000 outstanding) at $25 per share

Rectangle Corporation bonds: $200,000 (10-year, 5 percent) purchased at par (not to be held to maturity or actively traded)All companies have a December 31 year-end. Subsequent to acquisition, the following data were available:

Required:

Req. 1?What accounting method should be used for the investment in Square common stock? Rectangle bonds? Why?

Req. 2 Give the journal entries for Pentagon Company for each year in parallel columns (if none, explain why) for each of the following:

a. Purchase of the investments.

b. Income reported by Square Company and Rectangle Corporation.

c. Dividends and interest received from Square Company and Rectangle Corporation.

d. Fair value effects at year-end.

Req. 3 For each year, show how the following amounts should be reported on the financial statements:

a. Long-term investments.

b. Other comprehensive income for unrealized gains/losses.

c. Revenues and gains/losses.

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2019 2020 Net income reported at December 31: Square Company 941,000 986,000 Rectangle Corporation 1,250,000 1,320,000 Dividends and interest paid during the year: Square Company (cash dividends per share) 0.75 1.00 Rectangle Corporation (annual interest) 10,000 10,000 Fair value at December 31: Square Company (per share) 29.00 24.50 Rectangle Corporation 210,000 225,000