Partridge purchased a 60% interest in Sparrow on January 1, 2016, for $240,000.At the time of the purchase, Sparrow had the following stockholders' equity:
$$\begin{array} { l r }
\text { Common stock ( } \$ 10 \text { par) } & \$ 80,000 \
\text { Retained earnings } & \underline { 120,000 } \
\text { Total stockholders' equity } & \$ 200,000
\end{array}$$
Any excess is attributable to equipment with a 10-year life.On January 1, 2016, the retained earnings of Sparrow was $175,000.During the first 6 months of 2016, $25,000 was earned by Sparrow.The entire investment was sold for $300,000 on July 1, 2016.The gain (loss) was ____.
A)$87,000
B)$78,000
C)$12,000
D)$60,000

Question

Partridge purchased a 60% interest in Sparrow on January 1, 2016, for $240,000.At the time of the purchase, Sparrow had the following stockholders' equity: 
$$\begin{array} { l r } 
\text { Common stock ( } \$ 10 \text { par) } & \$ 80,000 \
\text { Retained earnings } & \underline { 120,000 } \
\text { Total stockholders' equity } & \$ 200,000
\end{array}$$
 Any excess is attributable to equipment with a 10-year life.On January 1, 2016, the retained earnings of Sparrow was $175,000.During the first 6 months of 2016, $25,000 was earned by Sparrow.The entire investment was sold for $300,000 on July 1, 2016.The gain (loss) was ____.
A)$87,000
B)$78,000
C)$12,000
D)$60,000

Quizplus · Accepted Answer

Step 1: Calculate the carrying value of Sparrow on January 1, 2016

Common stock: $60,000
Retained earnings: $175,000
Total stockholders' equity: $235,000

Step 2: Allocate the purchase price based on the proportionate values of the net assets acquired

Common stock: $60,000 x 60% = $36,000
Retained earnings: $175,000 x 60% = $105,000
Excess attributable to equipment: $240,000 - $235,000 = $5,000 x 60% = $3,000

Step 3: Adjust the carrying value of Sparrow's net assets based on the allocation of the purchase price

Common stock: $60,000 + $36,000 = $96,000
Retained earnings: $175,000 + $105,000 = $280,000
Excess attributable to equipment: $5,000 - $3,000 = $2,000

Step 4: Calculate the gain (loss) on the sale of the investment

Selling price: $300,000
Carrying value of investment: $240,000 x 60% = $144,000
Gain (loss): $300,000 - $144,000 = $156,000

Step 5: Allocate the gain (loss) based on the proportionate values of the net assets sold

Common stock: $96,000 x 60% = $57,600
Retained earnings: $280,000 x 60% = $168,000
Excess attributable to equipment: $2,000 x 60% = $1,200

Step 6: Calculate the gain (loss) attributable to Partridge

Allocated gain: $156,000 x 60% = $93,600
Investment in Sparrow sold for: $240,000 x 60% = $144,000
Gain (loss): $93,600 - ($240,000 - $144,000) = $78,600

Therefore, the gain (loss) was $78,000.

Partridge Purchased a 60% Interest in Sparrow on January 1