On January 4, 2016, Spandella Company purchased 175,000 shares of Filington Comp

Question

On January 4, 2016, Spandella Company purchased 175,000 shares of Filington Company directly from one of the founders for a price of $30 per share. Filington has 500,000 shares outstanding, including the shares acquired by Spandella Company. On July 2, 2016, Filington paid $620,000 in total dividends to its shareholders. On December 31, 2016, Filington reported a net income of $1,050,000 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

Chart of Accounts is not provided. So I am using the relevant account titles.

Total Shares outstanding in Filington company are 500,000 shares. Out of those Spandella company purchased 175,000 shares. So the share of Spandella company in Filington Company will be 175,000/500,000 * 100 = 35%.

A. The journal entries in Spandella Company using equity method will be as follows:

Date

Account Titles and Explanation

Debit

Credit

Jan 4, 2016

Investment in Filington Company A/c         Dr.

$5,250,000

To Cash A/c

$5,250,000

(Purchase of 175,000 shares @ $30 per share)

Jul 2, 2016

Cash A/c                                                           Dr.

$   217,000

To Investment in Filington Company A/c

$   217,000

(Cash Dividends received)

Dec 31, 2016

Investment in Filington Company A/c         Dr.

$   367,500

To Equity Income in Filington Company A/c

$ 367,500

(Record share of income from Filington Company)

July 2nd2016 – Total Dividend declared is $620,000. Spandella’s share of dividend is $620,000 * 35% = $217,000. Under equity method accounting, dividends paid is considered as return of the capital. So the Investment value will be reduced by the dividend amount.

December 31, 2016 – Net Income reported is $1,050,000. Spandella’s share of net income is $1,050,000 * 35% = $367,500. The share of income will increase the investment value in the Filington.

B The balance of the investment in Filington company stock account will be

Initial investment – Dividend Received + Share of net income

= $5,250,000 – 217,000 + $367,500 = $5,400,500

Date

Account Titles and Explanation

Debit

Credit

Jan 4, 2016

Investment in Filington Company A/c         Dr.

$5,250,000

To Cash A/c

$5,250,000

(Purchase of 175,000 shares @ $30 per share)

Jul 2, 2016

Cash A/c                                                           Dr.

$   217,000

To Investment in Filington Company A/c

$   217,000

(Cash Dividends received)

Dec 31, 2016

Investment in Filington Company A/c         Dr.

$   367,500

To Equity Income in Filington Company A/c

$ 367,500

(Record share of income from Filington Company)

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