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Equity Method for Stock Investment On January 4, Year 1, Ferguson Company purchased 96,000 shares of...

Equity Method for Stock Investment

On January 4, Year 1, Ferguson Company purchased 96,000 shares of Silva Company directly from one of the founders for a price of $57 per share. Silva has 300,000 shares outstanding, including the Daniels shares. On July 2, Year 1, Silva paid $278,000 in total dividends to its shareholders. On December 31, Year 1, Silva reported a net income of $897,000 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
Year 1, Dec. 31

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

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Answer #1
Percentage ownership 32% =96000/300000
a
Year 1, Jan. 4 Investment in Silva Company Stock 5472000 =96000*57
      Cash 5472000
Year 1, July 2 Cash 88960 =278000*32%
     Investment in Silva Company Stock 88960
Year 1, Dec. 31 Investment in Silva Company Stock 287040 =897000*32%
     Income of Silva Company 287040
b
Purchase cost 5472000
Add: Share of net income 287040
Less: Dividends received -88960
Balance of Investment in Silva Company Stock 5670080
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