Investments in Stocks-Equity Method
Response to the following problem:
On March 20, 2009, Reeder Company acquired 80,000 shares of Needed Industries common stock at $32 per share as a long-term investment. Needed has 200,000 shares of outstanding voting common stock. The following additional information is presented for the calendar year ended December 31, 2009:
Nov. 15 Reeder received a cash dividend of $1.50 per share from Needed Industries.
Dec. 31 Needed announced earnings for the year of $250,000.
31 Needed Industries common stock had a closing market price of $28 per share.
Required:
1. Interpretive Question: What accounting method should be used by Reeder Company to account for this investment? Why?
2. Prepare journal entries for the transactions and events described.