Question

On January 4, Year 1, Barber Company purchased 12,500 shares of Convell Company for $150,000 plus a broker's fee of $4,000. Convell Company has a total of 62,500 shares of common stock outstanding and it is presumed the Barber Company will have a significant influence over Convell. During each of the next two years, Convell declared and paid cash dividends of $0.75 per share, and its net income was $117,000 and $112,000 for Year 1 and Year 2, respectively. The January 12, Year 3, entry to record Barber's sale of 7,500 shares of Convell Company stock, which represents 60% of Barber's total investment, for $101,250 cash should be:

Answer 1

Answer:

Debit Cash $101,250; debit loss on sale of Investment $7,380;credit Long -term Investments $108,630

Explanation:

The journal entry is shown below:

Before that the following calculations could be done

Ownership  Percentage     20%

                                     ($12,500 ÷ $62,500)

Investment cost                        $154,000

$150,000 + $4,000

Add: Share of Year 1 net income $23,400

$117,000 × 20%  

Add: Share of Year 2 net income $22,400

$112,000 × 20%  

Less: Dividends for Year 1          -$9,375

12,500 × 0.75  

Less: Dividends for Year 2         -$9,375

12,500 × 0.75  

Carrying value of Investment      $181,050

The Journal entry is shown below:-

Cash Dr, 101,250

Loss on sale of Investment Dr, $7,380  

     To Long -Term Investments $108,630 (181050 × 60%)