Case:
Carla Allman is the manager of Stagg Corp., whose year-end is December 31. The company made two investments during the first week of January 20X2. Both investments are to be held for the indefinite future. Information about the investments follows:
a. Stagg purchased 30% of the common stock of Frontenac Mfg. Co. for its book value of $250,000. During the year ended December 31, 20X2, Frontenac earned $146,000 and paid dividends totaling $53,000. At year-end, the market value of the Frontenac investment is $261,000.
b. One thousand shares of the common stock of St. John Medical Corporation were purchased as an available-for-sale investment for $95,000. During the year ended December 31, 20X2, St.John paid Stagg a dividend of $3,000. St. John earned a profit of $317,000 for that period, and at year-end, the market value of Stagg's investment in St. John stock was $92,000.
Allman has come to you to ask how to account for the investments. Stagg has never had such investments before. Explain the proper accounting to her by indicating that different accounting methods apply to different situations.
Required:
Help Allman understand by writing a memo to
1. Describe the methods of accounting applicable to these investments.
2. Identify which method should be used to account for the investments in Frontenac Mfg. Co. and St. John Medical Corporation. Also indicate the dollar amount to report for each investment on the year-end balance sheet.