Question

Sox Corporation purchased a 30% interest in Hack Corporation for $ 1,725,000 on January 1, 2018. On November 1, 2018, Hack declared and paid $ 1.9 million in dividends. On December 31, Hack reported a net loss of $ 6.3 million for the year. What amount of loss should Sox report on its income statement for 2018 relative to its investment in Hack?

Answer 1

Answer:

The answer is $1,155,000

Explanation:

Purchase price is $1,725,000

Dividends declared is $1,900,000

So Sox Corporation's share of the dividend is $570,000(30% of $1,900,000)

Carrying value before net loss is:

Purchase price - share of dividends

$1,725,000 - $570,000

=$1,155,000

Net loss for the year is $6,300,000

So Sox Corporation's share of the dividend is $1,890,000(30% of $6,300,000)

The net loss of $1,890,000 is greater than $1,155,000. The investment account cannot be negative ($1,155,000 - $1,890,000). Hence, carrying value of $1,155,000 will be recognized as the amount of loss Sox will report on his income statement for 2018