Fair value and equity method compared

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1. (Fair Value and Equity Method Compared) Gregory Inc. acquired 20% of the outstanding common stock of Henderson Inc. on December 31, 2010. The purchase price was $1,250,000 for 50,000 shares. Henderson Inc. declared and paid an $0.80 per share cash dividend on June 30 and on December 31, 2011. Henderson reported net income of $730,000 for 2011. The fair value of Henderson's stock was $27 per share at December 31, 2011.

(a) Prepare the journal entries for Gregory Inc. for 2010 and 2011, assuming that Gregory cannot exercise significant influence over Henderson. The securities should be classified as available for- sale.

(b) Prepare the journal entries for Gregory Inc. for 2010 and 2011, assuming that Gregory can exercise significant influence over Henderson.

(c) At what amount is the investment in securities reported on the balance sheet under each of these methods at December 31, 2011? What is the total net income reported in 2011 under each of these methods?

Reference no: EM131116241

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