Textbook Problem

Accounting for Investments in Equity Securities

On January 1, 2019, Stem Corporation purchased 100 shares of common stock issued by Milstein Inc. (representing 12% of the total shares outstanding) for $6,000 and 500 shares of Heifetz Inc. (representing 25% of the total shares outstanding) for $20,000. Assume that the acquisition cost of each investment equals the book value of the related stockholders’ equity on the records of the investee. During 2019, Milstein declared and paid cash dividends to Stem of $500, and Heifetz declared and paid cash dividends to Stem of $1,700. Milstein reported 2019 net income of $12,000, and Heifetz reported 2019 net income of $15,000. On December 31, 2019, the market value of 100 shares of Milstein was $6,450, and the market value of 500 shares of Heifetz was $19,720.

Required:

Answer the following questions for both investments:

Milstein Heifetz

1. Which accounting method is applicable?

2. What amount is recorded in the investment account on the date of acquisition?

3. What amount is recorded in Stern’s net income from the investment?

4. What amount is reported for the investment on the balance sheet at December 31, 2019?