Task: Comparison of Fair Value and Equity Methods
On January 1, 2012, 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 for 2012 and 2013:
End of 2012:
Reported net income $80,000
Cash dividends declared and paid $30,000
Market value of shares $3.80 per share
End of 2013:
Reported net income $90,000
Cash dividends declared and paid $35,000
Market value of shares $4.25 per share
1. Prepare journal entries to record this information, assuming:
a). Snow uses the fair value method and the securities are classi?ed as available-for-sale.
b). Snow uses the equity method.
2. Assume 10,000 of the Garvey shares are sold on January 4, 2014, by Snow for $4.25 per share. Prepare the journal entry for this sale, assuming:
a). Snow uses the fair value method and the securities are classi?ed as available-for-sale.
b). Snow uses the equity method.