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Equity Method for Stock Investment On January 4, Year 1, Ferguson Company purchased 50,000 shares of...

Equity Method for Stock Investment

On January 4, Year 1, Ferguson Company purchased 50,000 shares of Silva Company directly from one of the founders for a price of $36 per share. Silva has 200,000 shares outstanding, including the Daniels shares. On July 2, Year 1, Silva paid $123,000 in total dividends to its shareholders. On December 31, Year 1, Silva reported a net income of $467,000 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
Income of Silva Company

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

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Answer #1
Ans.a
Date Accounts Titles & Explanations Debit Credit
4-Jan Investment in Silva Company Stock 1800000
Cash ( 50000 * 36) 1800000
2-Jul Cash (123000 * 50000 /200000) 30750
Investment in Silva Company Stock 30750
31-Dec Investment in Silva Company Stock 116750
Income of Silva Company (467000 * 50000 / 200000) 116750
Ans.b Particulars Amount
Initial Acquisition cost 1800000
Add: Equity earnings for year 1 116750
Less: Cash dividend received -30750
Investment in Silva Company Stock, Dec.31 1886000
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