Question

ppose on January 1 , 2016, Southern Molors pad S400 milion for a 35% mvestment an Phase Motors Assie (Click the icon to view the Equity Method Investment T-account) ncome of $40 miltlion and paid cash dividends of $40 miltion during 201 Assume that on January 1, 2017,Southern Motors sold haif is investment in Phase Molors The sale price was $165 milion Compute Southem Motors' gain or loss on the sale Let's compute the gain or loss on the sale of the investment (Round amounts to the nearest milion Use parenheses or a minus sign when showing a loss ) Sale proceeds Less Carrying amount of investment million onsale of rvostmont Choose from any list or enter any number in the input fields and then continue to the next question

Answer 1

Under Equity method, if the investee company pays dividend and received by the investor company then this dividend is not shown as income from the investment but it is reduced from the value of investment, which decreases the carrying value of investment of the investor company.

Here value of investment = $400 million
% of investment = 35%
Cash dividend paid by investee company = $40 million
Dividend rec.by investor company = $40 million * 35% = $14 million
Carrying value of investment = $400 million - $14 million
= $386 million

Half of investment sold: = 386/2 = $193 million

Sale Proceeds            $165 million
Carrying Value            $193 million
Loss on sale of investment = 165 - 193 = $28 million.