Comparison of Fair Value and Equity Methods
Response to the following problem:
On January 1, 2009 Snow Corporation purchased 20% of the 200,000 outstanding shares of common stock of Garvey Company for $4.00 per share as a long-term investment. The purchase price of the shares was equal to their book value. The following information is available about Garvey Company for 2009 and 2010:
End of 2009 Reported net income $80,000
Cash dividends declared and paid $30,000
Market value of shares $3.80 per share
End of 2010 Repotted net income $90,000
Cash dividends declared and paid $35,000
Market value of share $4.25 per share
Required:
1. Prepare journal entries to record this information, assuming:
a. The fair value method is used by Snow
b. The equity method is used by Snow
2. Assume 10,000 of the Garvey shares are sold on January 4, 2011 by Snow for $4.25 per share. Prepare the journal entry for this sale, assuming:
a. Snow is using the fair value method
b. Snow is using the equity method.