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Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition by Donald E. Kieso, Paul D. Kimmel, Jerry J. Weygandt

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EXERCISE 12-5

Purpose: (L.O. 3, 5) This exercise will allow you to compare the results of using the cost method with the results of using the equity method of accounting for an investment in stock.

The F. Sanderlin Corporation purchased 2,000 shares of common stock of the Nolty Bolt Corporation for $52 on January 2, 2014. The Nolty Bolt Corporation reported net income of $54,000 and $60,000 for 2014, and 2015, respectively, and paid dividends of $20,000 and $24,000 on December 20 of 2014 and 2015, respectively. The accounting period is the calendar year. The market price of Nolty Bolt common stock was $58 on December 31, 2014, and $50 on December 31, 2015. This security is F. Sanderlin's only long-term portfolio investment.

Instructions

(a) For the investor's books, prepare all the necessary journal entries to record the foregoing events that occurred in 2014 and 2015, assuming the 2,000 shares represent 16% of the outstanding stock of the investee.

(b) For the investor's books, prepare all the necessary journal entries to record the foregoing events that occurred in 2014 and 2015, assuming the 2,000 shares represent 25% of the outstanding stock of the investee.

(c) Based on your entries in (a) and (b) above, complete the following:

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