Lisa Company had 100,000 outstanding common shares. On January 10, 2017, Marg Company purchased a block of these shares in the open market at $20 per share, with the intent of holding the shares for a long time. At the end of 2017, Lisa reported net income of $300,000 and cash dividends of $0.60 per share. At December 31, 2017, Lisa Company shares were selling at $18 per share.

Required:

1. This problem involves two separate cases. For each case (shown in the table below), identify the method of accounting that Marg Company should use. Explain why.

2. Give the journal entries for Marg Company at the dates indicated for each of the two independent cases. If no entry is required, explain why. Use the following format:

3. Complete the following schedule to show the separate amounts that should be reported on the 2017 financial statements of Marg Company:

4. Explain why assets and investment income for the two cases are different.

Transcribed Image Text:

Case B: Case A: 10,000 Shares Purchased 40,000 Shares Purchased Journal entries made by Marg Company: a. To record the acquisition of Lisa Company on January 10, 2017 b. To recognize the income reported by Lisa Company for 2017 c. c. To recognize the dividends declared and paid by Lisa Company d. Entry to recognize the market value effect at end of 2017 Dollar Amounts Case A Case B Balance sheet Investments Income Statement Investment Income Loss on Investments Equity in Investee Earnings