Long term Investments - adjusted to market and equity methods.
On January 1, 2010, Cavalier Corporation purchased 8 percent of the voting stock of Onion Corporation for $500,000 and 45 percent of the voting stock of Dross Corporation for $4,000,000. During the year, Onion Corporation had net income of $200,000 and paid dividends of $80,000. Dross Corporation had net income of $600,000 and paid dividends of $400,000. The market value did not change for either company during the year.
Which investment should be accounted for using the adjusted to market method?
Which investment should be accounted for using the equity method?
At what amount should each investment be carried on the balance sheet at the end of the year? Explain your answers and show any
calculations necessary to arrive at your answers.