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Record each of these transactions

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Question 1 - On January 1, Rook Corporation, a publicly traded company, purchased 25% of Hook Ltd. common shares for $800,000. At December 26, Hook declared a $40,000 dividend (Rook received its share of that dividend on the same day) and reported net income of $80,000. The shares' fair value at December 31 was $840,000.

(a) Record each of these transactions, assuming Rook has significant influence over Hook and is using the equity method to account for this investment.

(b) How much income would Rook report because of its investment in Hook? Record strategic investment.

Question 2 - Using the data presented in above question, assume that Rook Corporation is a private company and reports under ASPE. It has chosen to account for its investment in Hook Ltd. using the cost model because the shares do not trade in an active market.

(a) Record each of the transactions given in question 1 under this assumption.

(b) How much income would Rook now report for the year?

(c) Explain why this differs from your answer in question 1.

Reference no: EM133065294

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