Question (continuation)
What should be the gain on sale of this investment in Lee's Year 2 income statement?
Answer:
The gain on sale is $12,250
Explanation:
Year 1:
Purchase Price for year 1 is $100,000
Year 1 Income: 30% of $40,000 = $12,000
Year 1 Dividend: 30% of $25,000 = $7,500 (Subtract)
Balance at the end of year 1 is $100,000 + $12,000 - $7,500 = $104,500
Year 2:
Year 2 income: ½ * 30% of $50,000 = $7,500 (For half a year)
Year 2 dividend: 30% of 15,000 = $4,500 (Subtract)
Balance at end of Year 2 = $104,500 + $7,500 - $4,500 = $107,500
Lee sold 50% of its stock = ½ of $107,500 = $53,750
Cost of half stock sold: $53,750
Selling price of: $66,000
Gain = $66,000 - $53,750 = $12,250
