Partridge & Sparrow scenario:
Partridge purchased a 60% interest in Sparrow on January 1, 20X1, for $240,000. At the time of the purchase, Sparrow had the following stockholders' equity:
Any excess is attributable to equipment with a 10-year life. On January 1, 20X6, the retained earnings of Sparrow was $175,000.
-Refer to Partridge and Sparrow. During the first 6 months of 20X6, $25,000 was earned by Company S. The entire investment was sold for $300,000 on July 1, 20X6. The gain (loss) was ____.
A) $87,000
B) $78,000
C) $12,000
D) $60,000

Question

Partridge & Sparrow scenario:
Partridge purchased a 60% interest in Sparrow on January 1, 20X1, for $240,000. At the time of the purchase, Sparrow had the following stockholders' equity:
  Any excess is attributable to equipment with a 10-year life. On January 1, 20X6, the retained earnings of Sparrow was $175,000.
-Refer to Partridge and Sparrow. During the first 6 months of 20X6, $25,000 was earned by Company S. The entire investment was sold for $300,000 on July 1, 20X6. The gain (loss) was ____.
A) $87,000 
B) $78,000 
C) $12,000 
D) $60,000

Quizplus · Accepted Answer

To calculate the gain (loss) on the sale of investment, we need to determine the carrying value of the investment on July 1, 20X6. 
As of January 1, 20X6, the retained earnings of Sparrow were $175,000. This means that the retained earnings as of July 1, 20X6 would be $200,000 (January 1, 20X6 + $25,000 earned during the first 6 months of 20X6).

The carrying value of the investment would be:
Purchase price - (60% * net assets acquired) + Partridge's share of retained earnings
= $240,000 - (60% * $70,000) + (60% * $200,000)
= $240,000 - $42,000 + $120,000
= $318,000

The gain (loss) on the sale would be:
Sale price - carrying value of investment
= $300,000 - $318,000
= ($18,000)

Therefore, the answer is B.

Partridge & Sparrow Scenario