Chapter A, Problem 3AP

Reporting Passive Investments

During January 2017, Pentagon Company purchased 12,000 shares of the 200,000 outstanding common shares (no-par value) of Square Corporation at $25 per share. This block of stock was purchased as a long-term investment. Assume that the accounting period for each company ends December 31. Subsequent to acquisition, the following data were available:

	2017	2018
Income reported by Square Corporation at December 31	$40,000	$60,000
Cash dividends declared and paid by Square Corporation
during the year	$60,000	$80,000
Market price per share of Square common stock on
December 31	$28	$27

Required:

1. 1. What accounting method should Pentagon Company use? Why?
2. 2. Give the journal entries for the company for each year (use parallel columns) for the following (if none, explain why):
   1. a. Acquisition of Square Corporation stock.
   2. b. Net income reported by Square Corporation.
   3. c. Dividends received from Square Corporation.
   4. d. Fair value effects at year-end.
3. 3. For each year, show how the following amounts should be reported on the financial statements:
   1. a. Long-term investments.
   2. b. Stockholders’ equity—net unrealized loss/gain.
   3. c. Revenues.