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Equity Method for Stock Investment On January 4, Year 1, Ferguson Company purchased 160,000 shares of...

  1. Equity Method for Stock Investment

    On January 4, Year 1, Ferguson Company purchased 160,000 shares of Silva Company directly from one of the founders for a price of $44 per share. Silva has 400,000 shares outstanding, including the Daniels shares. On July 2, Year 1, Silva paid $432,000 in total dividends to its shareholders. On December 31, Year 1, Silva reported a net income of $1,494,000 for the year. Ferguson uses the equity method in accounting for its investment in Silva.

    a. Provide the Ferguson Company journal entries for the transactions involving its investment in Silva Company during Year 1.

    Year 1, Jan. 4 Investment in Silva Company Stock
    Cash
    Year 1, July 2 Cash
    Investment in Silva Company Stock
    Year 1, Dec. 31 Investment in Silva Company Stock
    Investment in Silva Company Stock

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    a.

    Jan 4: Record the investment at cost.

    July 2: Calculate the ownership percentage. Under the equity method of accounting for investments, the dividends earned affect the investment account.

    Dec. 31: Calculate the ownership percentage. Under the equity method of accounting for investments, the share of income affects the investment account.

    b. Determine the December 31, Year 1, balance of Investment in Silva Company Stock.
    $

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    b. Set up a T account for the Investment account and calculate the ending investment using your answers from requirement (a).

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Expert Solution

Solution:

Requirement a:

Date General Journal Debit Credit
Year 1, Jan. 4 Equity Investment $            7,040,000
Cash $          7,040,000
[To record investment in equity]
Year 1, July. 2 Cash [432000*40%] $               172,800
Equity Investment $             172,800
[To record Dividend revenue]
Year 1, Dec. 31 Equity Investment [1494000*40%] $               597,600
Equity Income $             597,600
[To record income earned on equity investment]

Percentage of Ownership = 160000 / 400000 = 40%

Requirement b:

Particulars Amount $
Equity Investment $       7,040,000
Add: Net Income $           597,600
Less: Dividend $         (172,800)
Value @ 160000 Shares as on December 31st $       7,464,800

T-Account:

Equity Investment Account
Year 1, Jan. 4 $          7,040,000 Year 1, July. 2 $ 172,800
Year 1, Dec. 31 $             597,600
End Balance $          7,464,800

ekkarill92 answered 2 weeks ago
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