Question

Posada Company acquired 7,000 of the 10,000 outstanding shares of Sabathia Company on January 1, 2019, for $840,000. The subsidiary's total fair value was assessed at $1,200,000 although its book value on that date was $1,130,000. The $70,000 fair value in excess of Sabathia's book value was assigned to a patent with a five-year remaining life. On January 1, 2021, Posada reported a $1,085,000 equity method balance in the Investment in Sabathia Company account. On October 1, 2021, Posada sells 1,000 shares of the investment for $191,000. During 2021, Sabathia reported net income of $120,000 and declared dividends of $40,000. These amounts are assumed to have occurred evenly throughout the year. a. How should Posada report the 2021 income that accrued to the 1,000 shares prior to their sale

Answer 1

Answer:

1.-The balance in investment account as of the October 2013 before sale : 1,140,650

2.-Balance in investment account after the sale

977,700

Explanation:

1.Investment balance as on 1st Jan 2013        1,085,000  

Add : Share of Profit for 9 month of 2013              63,000 =120000/12*9*70%

Less: Amortization of acquisition premium for 9 month                7,350 =70000/5*9/12*70%

Investment balance as on 1st Oct 2013        1,140,650  

Less : Cost of Sales of Investment            162,950 =1140650/7000*1000

Balance after sale of Investment            977,700  

Calculate the effect (profit or loss) from the sale of the 1,000 shares

Number of shares as on 1st Oct 2013          7,000.00

Value Per share (1,140,650/7,000)              162.95

Number of shares sold          1,000.00

Value of investment sold      162,950.00

Less : Sales consideration of investment sold      191,000.00

Gain on Sale of Investment        28,050.00

2.-Investment balance as on 1st Jan 2013        1,085,000  

Add : Share of Profit for 9 month of 2013              63,000 =120000/12*9*70%

Less: Amortisation of acquisition premium for 9 month                7,350 =70000/5*9/12*70%

Investment balance as on 1st Oct 2013        1,140,650  

Less : Cost of Sales of Investment            162,950 =1140650/7000*1000

Balance after sale of Investment            977,700