As the text explains, you as a CFO may elect to use the fair value method of investment accounting when you are unable to exercise significant influence or you can:
On January 1st, Ham purchases for cash 20,000 shares of Terror for $40 per share which is Terror current stock price.
For the next three years, assume the following operations for Terror:
Yr 1:Dividends. $1.25 per share. Yr 2: Dividends. $1.30 per share. Yr 3: Dividends. $1.35 per share
Yr 1: Earnings. $2.00 per share. Yr 2: Earnings. $2.20 per share. Yr 3: Earnings. $1.90 per share
Yr 1: Stock price. $42.00. Yr 2: Stock price. $ 44.00. Yr 3: Stock price. $36.00
REQUIRED:
1. Ham uses the fair value method to account for its investment in Terror. Prepare applicable journal entries for each year to record Terror activity
2. Ham uses the equity method to account for its investment in Terror. Prepare applicable journal entries fir each year to record Terror activity
3. Compare, contrast, and evaluate the differences in the two accounting methods. Your response should include a balance sheet and income statement impact as well as any other relevant observations.
4. Which method do you prefer and why?
