Posthorn Corporation Essay

Posthorn Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2010, for a cash consideration of $200,000 at a time when its shareholders’ equity amounted to $1,000,000. The shares of both companies were traded on the national stock exchange. During 2010, Stamp Company had net income of $120,000 and paid dividends of $80,000. At the end of 2010, shares of Stamp Company were trading for $11 each. During 2011, Stamp Company had a loss of $60,000 and paid dividends of $40,000. Income for the first half of the year was $80,000 and the loss in the second half of the year was $140,000.

The dividends were paid on June 30. On July 2, 2011, Posthorn Corporation sold 5,000 shares of Stamp Company for a consideration of $12 per share. At the end of 2011, the share price of Stamp Company had fallen to $6 per share. The average of market analysts’ forecasts was that the share price could be expected to rise to $8 per share over the next five years. Posthorn Corporation has not elected early adoption of the new standards for financial instruments which become effective on January 1, 2015.


For each of the following independent assumptions, state the amounts that Posthorn Corporation would include in its 2011 financial statements, with respect to its investment in Stamp Company for (i) its investment in Stamp Company; (ii) net income; and (iii) other comprehensive income. a) Posthorn Corporation accounts for its investment in Stamp Company as a fair value through profit and loss investment; b) Posthorn Corporation accounts for its investment in Stamp Company as an available for sale investment; c) Posthorn Corporation accounts for its investment in Stamp Company as a significant influence investment; d) Posthorn Corporation accounts for its investment in Stamp Company using the cost method.


a) Assume that the number of shares held by Blake is enough to give it significant influence over Stergis. Prepare all the journal entries that Blake should make regarding this investment in Year 5 and Year 6. b) Assume that Blake uses the cost method to account for its investment. Prepare all the journal entries that Blake should make regarding this investment in Year 5 and Year 6.

Question 3 (15 marks) (Text, Chapter 2, Case 4)

On January 1, Year 6, Progress Technologies Inc. acquired 40 percent (10,000 shares) of the voting shares of the Calgana Corp. Toward the end of Year 6, it seemed likely that Progress would have earnings for the year of approximately $10,000 (exclusive of earnings attributed to its investment in Calgana) and that Calgana would have earnings of approximately $50,000. The CEO of Progress was disappointed in the forecast earnings of both companies. Prior to Year 6, Progress had increased its earnings by 10 percent each year, and Progress would have to report total earnings in Year 6 of $45,000 if the trend was to continue.

Read also  Weekly Commentary on the Trading in Kuwaiti Stock Exchange


a) Suppose Progress Technologies Inc. reports its interest in Calgana Corp. using the equity method. i) If Calgana is to declare its usual dividend of $0.50 per share, what would be the total reported income of Progress? ii) The CEO of Progress suggested that Calgana be directed to declare a special dividend of $3 per share. What impact would the additional dividend have on the reported earnings of Progress? b) Suppose that Progress Technologies Inc. reports its investment in Calgana Corp. using the cost method. iii) What would be the total reported earnings of Progress if Calgana declared its regular dividend of $0.50 per share? iv) What impact would the additional dividend of $3 per share have on reported earnings of Progress? c) Explain fully why the equity method (rather than the cost method) is appropriate for firms that can exert significant influence over other companies in which they have an interest.

More Essays

  • Mini Case Gilbert Enterprise

    The firm's stocks are undervalued. According to the dividends, growth rate, and discount rate the share price should be $43. 36 which is $8. 11 higher than the current market price. If the repurchase of $1Million worth of shares occurs, the company's Return on Equity would increase. This would happen since...

  • Dividend Yield and Common Equity

    Q1: Percy Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 9% and the company tax rate is 40%. Percy's CFO has calculated the company's WACC as 9.96%. What is the company's cost of common equity? Q2: Tunney Industries issued...

  • Preferred Stock Versus Common Stock

    The primary advantage to an investor of holding preferred stock compared with common stock is that the preferred stock return is somewhat more predictable (more certain). The issuing company will generally make a real effort to try to avoid defaulting on the preferred stock dividend. Since the return to...

  • Common Stocks – Long Positions

    The Parker Hannifin Corporation (PH) stock has recorded one of the longest running dividend increases among the S&P 500 for years. On May 8, it reported an amazing first quarter result that provided the much need thrust. The stock price was 38.82 on the trading day of Nov 20 from which it saw a significant...

  • Article Summary_ _the Bottom Line_ Marketing & Firm Performance_

    Leslie M. Fine, author of "The Bottom Line: Marketing & Firm Performance," analyzes how marketing relates to how well the firm does overall. A majority of the article is focused on how customer relations' impact firm performance and can affect shareholder wealth. Firms improving customer equity and reducing...

  • Introduction to Financial Management

    ABSTRACT In the United States we have two different kinds of stock exchange the NYSE and the NASDAQ even though they have some similarities they are different in so many different ways. This paper will discuss how the NYSE and the NASDAQ operate, how they are different and what is the public company...

  • Corporation_ Weekly Reflection

    3.1 Differentiate types of stocks issued by corporations. The team concluded that the different types of stocks issued by a corporation are common stock, preferred stock, and treasury stock. Everyone is aware that common stock gives stockholders the right to vote on actions dealing with corporate earnings...

  • Stock Dividend

    * Definition: * A corporate distribution to shareholders declared out of profits, at the discretion of the directors of the corporation, which is paid in the form of shares of stock, as opposed to money, and increases the number of shares. * A dividend paid as additional shares of stock rather than as...

  • Roles Played by the Asx and Asic

    1.0 Introduction On 1 April1987, six exchanges that operated in the state capital cities merged to form the ASX. It is an Australia's primary national market for equities, derivatives, and securities. In Nov.1998, the ASX became the first exchange in the world to have its shares listed on its own market....

  • Capital Market

    Concept, Security market, Primary & Secondary markets-Functions & Role, Functionaries of stock exchanges-Brokers, Sub- Brokers, Jobbers, Consultants ,Institutional Investors & NRIs. Definition of Capital Market Capital market is the market from where long-term capital raised for industry, trade and commerce...

Read also  Corporate Restructuring