Equity Method for Stock InvestmentOn January 4, Year 1, Ferguson Company purchased 80,000 shares of Silva Company directly from one of the founders for a price of $64 per share. Silva has 250,000 shares outstanding, including the Daniels shares. On July 2, Year 1, Silva paid $196,000 in total dividends to its shareholders. On December 31, Year 1, Silva reported a net income of $747,000 for the year. Ferguson uses the equity method in accounting for its investment in Silva.a. Provide the Ferguson Company journal entries for the transactions involving its investment in Silva Company during Year 1.Year 1, Jan. 4Investment in Silva Company Stock  Cash  Year 1, July 2Cash Dividends  Dividend Revenue  Year 1, Dec. 31     b. Determine the December 31, Year 1, balance of Investment in Silva Company Stock.$

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Asked Nov 16, 2019
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Equity Method for Stock Investment
On January 4, Year 1, Ferguson Company purchased 80,000 shares of Silva Company directly from one of the founders for a price of $64 per share. Silva has 250,000 shares outstanding, including the Daniels shares. On July 2, Year 1, Silva paid $196,000 in total dividends to its shareholders. On December 31, Year 1, Silva reported a net income of $747,000 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 Dividends

 

 


Dividend Revenue

 

 

Year 1, Dec. 31

 

 

 

 

 


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

 

 

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Expert Answer

Step 1

The investment in S company is the product of the shares purchased by the F Company and the price paid for each share. The purchase price of each share is $64 and the number of shares purchased is $80,000.

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Investment Shares outstanding xShare price =80,000 shares x$64 =S5,120,000

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Step 2

The purchase of investment will increase the investment account of the company. In case of the increase in assets, the related asset account of the company should be debited. Hence, the investment in the S company is debited. Thepurchase of investment will decrease the cash account of the company. In case of decrease in assets, the related asset account of the company should be credited. Hence, the cash account is credited. 

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|Accounts, Title & Explanation |Investment in S Company Credit(S) Dates Post ref. Debit(S) $5,120,000 Cash $5,120,000 (To record the purchase of investment

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Step 3

The dividend income is the product of the dividend paid by the S company and the percentage of share owned by the F Company. The ...

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Shares purchased Dividend income= Dividend paidx- Shares outstanding 80,000 shares =S196,000x- 250,000 shares =$62,720

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