Bart Company had outstanding 30,000 shares of common stock, par value $10 per share. On January 1, 2015, Homer Company purchased some of these shares at $25 per share, with the intent of holding them for a long time. At the end of 2015, Bart Company reported the following: net income, $50,000, and cash dividends declared and paid during the year, $25,500. The fair value of Bart Company stock at the end of 2015 was $22 per share.
1-a. Identify the method of accounting that Homer Company should use for purchasing 3,600 shares (Case A). TIP: Divide the number of shares purchased by the number outstanding to determine the percent of ownership.
A) The Fair Value Method B)The Equity Method
1-b. Identify the method of accounting that Homer Company should use for purchasing 10,500 shares Case B.
A)The Fair Value Method B)The Equity Method
1-a) The ownership is 3600/30000 = 12%.
Homer Company should use (A) the Fair value method as the investment is less than 20%.
1-b) The ownership is 10500/30000 = 35%. As the percentage is more than 20% but less than 50%, (B) the Equity method should be used.