Question

On January 3, 2018, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2018, Thomas reported net income of $300,000 and paid dividends of $100,000. On January 4, 2019, Roberts sold 15,000 shares for $800,000. What is the gain/loss on the sale of the 15,000 shares

Answer 1

Answer:

The gain/loss on the sale of the 15,000 shares is $20,000

Explanation:

The value of the investment as at the end of 2018 using the equity method is computed thus:

Note that 30% of 100,000 shares=30,000 shares

ending value =initial investment+share of profit-share of dividends

ending value =$1,500,000+($300,000*30%)-($100,000*30%)

ending value=$1560000

gain/(loss)=$800,000-($1560000 *15000/30000)

gain/(loss)=$20,000