On January 4, Year 1, Ferguson Company purchased 72,000 shares of Silva Company directly from one of the founders for a price of $59 per share. Silva has 200,000 shares outstanding, including the Daniels shares. On July 2, Year 1, Silva paid $194,000 in total dividends to its shareholders. On December 31, Year 1, Silva reported a net income of $661,000 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 14,400,000 x Cash Year 1, July 2 Year 1, Dec. 31 Feedback " Check My Work 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.
On January 4, Year 1, Ferguson Company purchased 72,000 shares of Silva Company directly from one of the founders for a price of $59 per share. Silva has 200,000 shares outstanding, including the Daniels shares. On July 2, Year 1, Silva paid $194,000 in total dividends to its shareholders. On December 31, Year 1, Silva reported a net income of $661,000 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 14,400,000 x Cash Year 1, July 2 Year 1, Dec. 31 Feedback " Check My Work 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:1. EX.15-01
Equity Method for Stock Investment
On January 4, Year 1, Ferguson Company purchased 72,000 shares of Silva Company directly from one of the founders for a price of $59 per share. Silva has 200,000 shares outstanding, including the Daniels
2. EX.15-02
shares. On July 2, Year 1, Silva paid $194,000 in total dividends to its shareholders. On December 31, Year 1, Silva reported a net income of $661,000 for the year. Ferguson uses the equity method in
accounting for its investment in Silva.
3. EX.15-03
a. Provide the Ferguson Company journal entries for the transactions involving its investment in Silva Company during Year 1.
4. EX.15-06
Investment in Silva Company Stock
Year 1, Jan. 4
14,400,000 X
5. EX.15-08.ALGO
Cash
6. EX.15-11.ALGO
Year 1, July 2
7. EX.15-14.ALGO
Year 1, Dec. 31
Feedback
V Check My Work
a.
Jan 4: Record the investment at cost.
July 2: Calculate the ownership percentage. Under the equity method of accounting for investments, the dividends earned affect the investment account.
Dec. 31: Calculate the ownership percentage. Under the equity method of accounting for investments, the share of income affects the investment account.
b. Determine the December 31, Year 1, balance of Investment in Silva Company Stock.
2$
Expert Solution
Introduction
The equity method is applied, when the investor holds significant influence in the company. In this method, investment is initially recorded at cost, and the dividend received is treated as a recovery of cost.
Further, in this method, the value of the investment is increased or decreased with the net income or net loss reported by the investee company, in the proportion to the shareholding.
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