Equity Method
Response to the following problem:
Foster Enterprises purchased 20% of the outstanding common stock of Novelties, Inc., on January 2, 2009, paying $150,000. During 2009, Novelties, Inc., reported net income of $20,000 and paid dividends to shareholders of $15,000. On December 31, 2009, Foster's investment in Novelties stock had a fair market value of $158,000.
Assuming this is the only security owned by Foster, prepare all journal entries required by Foster in 2009 assuming:
1. The security is classified as a trading security.
2. The security is classified as an available-for-sale security.
3. The equity method is applied to the investment.