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11 June, 21:46

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?

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  1. 11 June, 22:39
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    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).
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