For 2010 and 2011,Sabil Corporation Earned Net Income of $480,000

question 5

Essay

For 2010 and 2011,Sabil Corporation earned net income of $480,000 and $640,000 and paid dividends of $18,000 and $20,000,respectively.At January 1,2010,Sabil had $200,000 of $10 par value common stock outstanding and $1,500,000 of retained earnings.
On January 1 of each of these years,Phyit Corporation bought 10% of the outstanding common stock of Sabil paying $200,000 per 10% block on January 1,2010 and 2011.All payments made by Phyit in excess of book value were attributable to equipment,which is depreciated over ten years on a straight-line basis.
Required:
1.If Phyit uses the cost method of accounting for its investment in Sabil,how much dividend income will Phyit recognize in 2010 and 2011,and what will be the balance in the investment account at the end of each year?
2.If Phyit has significant influence and can justify using the equity method of accounting,how much net investee income will Phyit recognize for 2010 and 2011?

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Definitions:

Marketable Securities

Financial instruments that are easily convertible into cash, typically with high liquidity and short maturity periods, such as stocks and bonds.

Another Company

This term refers to an entity different from the one currently being discussed or involved.

Volatile Interest Rates

Interest rates that fluctuate frequently and unpredictably, often affecting borrowing and saving costs.