Rochester Enterprises purchased 500 shares of Newark Corporation for $15 per share on June 15, 2011, when Newark had approximately 10,000 equity shares outstanding. Rochester held the investment throughout 2011, and as of December 31, the per-share market price had risen to $18. On January 16, 2012, Rochester sold 300 shares for $19 per share, and on October 20 sold the remaining 200 shares for $13 each. The company held no other security investments during this time period.
REQUIRED:
a. Assume that Rochester classified the investment as trading securities, and provide the journal entries recorded on June 15, 2011; December 31, 2011; January 16, 2012; and October 20, 2012.
b. Assume that Rochester classified the investment as available-for-sale securities, and provide the journal entries recorded on June 15, 2011; December 31, 2011; January 16, 2012; and October 20, 2012.
c. Compute the net cash effect of these transactions across 2011 and 2012.
d. Compute the 2011, 2012, and total income effect, assuming that the investment was classified as trading securities.
e. Compute the 2011, 2012, and total income effect, assuming that the investment was classified as available-for-sale securities.
f. Comment on the difference between the two assumptions.