Question

On January 4, Year 1, Ferguson Company purchased 480,000 shares of Silva Company directly from one of the founders for a price of $30 per share. Silva has 1,200,000 shares outstanding, including the Daniels shares. On July 2, Year 1, Silva paid $750,000 in total dividends to its shareholders. On December 31, Year 1, Silva reported a net income of $2,000,000 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.
b. Determine the December 31, Year 1, balance of the investment in Silva Company stock account.

Answer 1

Date Title $ Dr $ CR

Jan 4 Investment in company 14,400,000

Jan 4 Cash 14,400,000

July 2 Cash 300

July 2 Investment 300

Dec 31 Investment 800,000

Dec 31 Investment 800,000

Explanation :

Equity method of accounting is an accounting method of recording of treating investment in associate . Investment in associate is an investment with acquisition of of other company's share in the range of 20 - 50% of the company's total share . It does not give control but significant influence

Jan 4 = No of share bought * share price =$30 * 480000= 14,400,000

July 2 = Percentage of shares bought to total shares * total dividend=

480000/1200000*750000 = $300

Dec 31 = percentage of shares bought to total share * net income

480000/1200,000 * 2,000,000 = $800,000