Question

On January 4, Year 1, Ferguson Company purchased 75,000 shares of Silva Company directly from one of the founders for a price of $43 per share. Silva has 300,000 shares outstanding, including the Daniels shares. On July 2, Year 1, Silva paid $218,000 in total dividends to its shareholders. On December 31, Year 1, Silva reported a net income of $689,000 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.
$

Answer 1

a)

Year 1, Jan. 4	Investment in Silva Company Stock	3,225,000
	Cash		3,225,000
Year 1, July 2	Cash	54,500
	Investment in Silva Company Stock		54,500
Year 1, Dec. 31	Investment in Silva Company Stock	172,250
	Income of Silva Company		172,250

Total shares of Silva Company = 300,000

Number of shares acquired of Silva Company = 75,000

Hence, percentage of shares acquired of Silva Company = 75,000/300,000

= 25%

Cost of 25% common stock acquired of Silva Company = Number of shares bought x Price per share

= 75,000 x 43

= $3,225,000

Revenue from investment in Silva Company = Net income of Silva Company x Percentage of common stock acquired

= 689,000 x 25%

= $172,250

Share of dividend from Silva Company = Dividend paid by Silva Company x Percentage of common stock acquired

= 218,000 x 25%

= $54,500

b)

Balance in investment at December 31 = Cost of 25% common stock acquired of Silva Company + Revenue from investment in Silva Company - Share of dividend from Silva Company

= 3,225,000 + 172,250 - 54,500

= $3,342,750

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