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Indicate the effect of this investment income before taxes

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Reference no: EM13996191

On January 2, 2011, Sanborn Tobacco, Inc., bought 5% of Jackson Industry's capital stock for $90 million as a temporary investment. Sanborn realized that these securities normally would be classified as available-for-sale, but elected the fair value option to account for the investment. Jackson Industry's net income for the year ended December 31, 2011, was $120 million. The fair value of the shares held by Sanborn was $98 million at December 31, 2011. During 2011, Jackson declared a dividend of $60 million.

Required:

1. Would this investment be classified on Sanborn's balance sheet as held-to-maturity securities, trading securities, available-for-sale securities, significant-influence investments, or other? Explain.

2. Prepare all appropriate journal entries related to the investment during 2011.

3. Indicate the effect of this investment on 2011 income before taxes. 

Reference no: EM13996191

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