Question

On January 3, 2013, 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 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, Roberts sold 15,000 shares for $800,000. What is the appropriate journal entry to record the sale of the 15,000 shares?

Answer 1

Answer:

The appropriate journal entry to record the sale of the 15,000 shares:

Dr Cash                                            800,000

Cr Investment - Thomas Corp       780,000

Cr Gain on investment disposal    20,000

(to record the investment disposal of 15,000 Thomas Corp's shares)

Explanation:

Before the disposal of the investment on Thomas, Roberts Co. should use the equity method to account for this investment because 30% of Thomas' shares which is 30,000 ( 100,000 x 30%) is possessed by Robert Co. and Robert Co. has significant influence over Thomas.

So, by the end of 2013, Robert's treatment to this investment should be:

Opening balance as of 2013:        $1,500,000

Plus: Share of net profit        :        $90,000   (calculated as 300,000 x 30%)

Minus: Dividend received     :        $(30,000) (calculated as 100,000 x 30%)

Closing balance as of 2013:          $1,560,000

=> Value per share = 1,560,000 / 30,000 = $52.

So, as at January 4 2014, because 15,000 shares is sold, the Investment account is Credited ( decreased) by $780,000 ( 52 x 15,000) and the total sales's receipt of $800,000 will generate the profit of $20,000 ( calculated as $800,000 - $780,000).