On January 4, 2016, Spandella Company purchased 159,600 shares of Filington Comp

Question

On January 4, 2016, Spandella Company purchased 159,600 shares of Filington Company directly from one of the founders for a price of $25 per share. Filington has 570,000 shares outstanding, including the shares acquired by Spandella Company. On July 2, 2016, Filington paid $729,000 in total dividends to its shareholders. On December 31, 2016, Filington reported a net income of $1,002,000 for the year. Spandella uses the equity method in accounting for its investment in Filington. Required: A. Provide the Spandella Company journal entries for the transactions involving its investment in Filington Company during 2016. Refer to the Chart of Accounts for exact wording of account titles. B. Determine the December 31, 2016, balance of the Investment in Filington Company Stock account.

Explanation / Answer

Spandella shareholding in filington = No. of shares purchased/ outstanding shares=159,600 / 570,000 = 28%

1. January 4,2016

Investment in Felington company $3,990,000 ( 159,600 * $25 )

Cash $3,990,000

2. July 2, 2016

Cash $204,120 ( $729,000 * 28%)

Investment in Felington company $204,120

3. December 31,2016

Investment in Felington company $280,560 ( 1,002,000 *28%)

Equity income $280,560

B, Balance of investment in Filington company

Balance as per investment $3,990,000

Add Equity income   $280,560

Less Dividend received ($204,120)

Balance of investment $4,066,440

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