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On January 1, 2017, Abalone Ltd.acquired 30% of Flounder Corp.'s common shares for $240,000.During 2017, Flounder reported net income of $100,000 and paid total dividends of $60,000.Abalone's 30% interest in Flounder gives Abalone the ability to exercise significant influence over their operating and financial policies.During 2018, Flounder reported net income of $150,000 and paid total dividends of $30,000 on April 1 and $40,000 on October 1.On July 1, 2018, Abalone sold half of its shares in Flounder for $158,000 cash.
-The gain on sale of this investment in Abalone's 2018 income statement should be
A)$8,000.
B)$20,750.
C)$25,250.
D)$32,000.

Question

Quizplus · Accepted Answer

The gain on sale is calculated as the difference between the selling price and the carrying value of the investment. The carrying value of the investment is the initial cost plus the share of net income minus the share of dividends received. The share of net income is 30% of Flounder's net income, and the share of dividends received is 30% of Flounder's dividends.For 2017, Abalone's share of Flounder's net income is $30,000 (30% x $100,000), and its share of Flounder's dividends is $18,000 (30% x $60,000). Therefore, the carrying value of Abalone's investment in Flounder at the beginning of 2018 is $240,000 + $30,000 - $18,000 = $252,000.For 2018, Abalone's share of Flounder's net income is $45,000 (30% x $150,000), and its share of Flounder's dividends is $21,000 (30% x $70,000). Therefore, the carrying value of Abalone's investment in Flounder at the date of sale is $252,000 + $45,000 - $21,000 = $276,000.The gain on sale is $158,000 (selling price) - $276,000 (carrying value) = $25,250.

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