Question

The balance of Pop’s investment in Son account at 12/31/17, was $436,000, consisting of 80% of Son’s $500,000 stockholders’ equity on that date and $36,000 goodwill.

On 5/1/18, Pop sold a 20% interest in Son (one-fourth of its holdings) for $130,000. During 2018, Son had net income of $150,000, and on 7/1/18, Son declared dividends of $80,000.

Solve using both the actual date of sale assumption and the beginning of the year sale assumption.

1. Determine the gain or loss on sale of the 20% interest.

2. Calculate Pop’s income from Son for 2018.

3. Determine the balance of Pop’s Investment in Son account at 12/31/18.

Answer 1

1. Calculation of Gain or Loss on sale of 20% interest :

ACTUAL DATE OF SALE ASSUMPTION : On 1/5/18 pop sold 20% interest :

Value of investment on the date of sale that is 1/5/18:

Investment held on 31/12/17 : $ 4,36,000

Share in profit earned during 2018 : $ 50,000

(Assumed son’s income of $1,50,000 in 2018 is evenly during the year

1,50,000 / 12 months = $12,500 for a month and

$ 50,000 for 4 Month ( 1/1/18 to 1/5/18))

Dividend Income : $ 64,000

Total Value   ( $ 4,36,000+ $ 50,000+ $ 64,000)                                                    $ 5,50,000

Sold share’s Value ( $ 5,50,000 * 20 % )        (B) $ 1,10,000

Sale Price             (A)                                                                                                $ 1,30,000

PROFIT (A-B)                                                                                             $ 20,000

Beginning of the year sale assumption :

Value of investment on the date of sale that is 1/1/18:

Investment held on 31/12/17 : $ 4,36,000

Share in profit earned during 2018 : -

Dividend Income :                                                                                                              -

Total Value                                                                                                                               $ 4,36,000

Sold share’s Value ( $ 4,36,000 * 20 % )        (B) $ 87,200

Sale Price             (A)                                                                                                      $ 1,30,000

PROFIT (A-B)    $ 42,800

2. Calculation of Pop’s income from Son for 2018. :

Income From Profit : ( $ 1,50,000 * 80 % ) $ 1,20,000

Dividend Income : ( $ 80,000 * 80% ) $ 64,000

Total Income ( $ 1,20,000 + $ 64,000 ) $ 1,84,000