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:
$$\begin{array} { l r }
\text { Common stock } ( \$ 10 \text { par } ) & \$ 80,000 \
\text { Retained earnings } & \underline { 120,000 } \
\quad \text { Total stockholders' equity } & \$ 200,000
\end{array}$$
Any excess is attributable to goodwill.On January 1, 2016, the retained earnings of Sparrow was $175,000.The entire investment was sold for $300,000 on January 1, 2016.At that date, Partridge had on hand inventory it had purchased from Sparrow for $50,000.Sparrow has a gross profit percentage of 40%.The gain (loss) was ____.
A)$105,000
B)$81,000
C)$27,000
D)$39,000

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: 
$$\begin{array} { l r } 
\text { Common stock } ( \$ 10 \text { par } ) & \$ 80,000 \
\text { Retained earnings } & \underline { 120,000 } \
\quad \text { Total stockholders' equity } & \$ 200,000
\end{array}$$
 Any excess is attributable to goodwill.On January 1, 2016, the retained earnings of Sparrow was $175,000.The entire investment was sold for $300,000 on January 1, 2016.At that date, Partridge had on hand inventory it had purchased from Sparrow for $50,000.Sparrow has a gross profit percentage of 40%.The gain (loss) was ____.
A)$105,000
B)$81,000
C)$27,000
D)$39,000

Quizplus · Accepted Answer

Step 1: Calculate the goodwill
Purchase price = $240,000
Fair value of assets = $235,000
Goodwill = Purchase price - Fair value of assets = $240,000 - $235,000 = $5,000
Step 2: Calculate the cost of the inventory on hand
Inventory on hand = $50,000
Step 3: Calculate the gain or loss on the sale of the investment
Sparrow's total stockholders' equity = $235,000 + $40,000 = $275,000
Partridge's initial investment = 60% x $275,000 = $165,000
Partridge's share of retained earnings = 60% x $175,000 = $105,000
Partridge's share of total stockholders' equity = $165,000 + $105,000 = $270,000
Proceeds from the sale of investment = $300,000
Partridge's share of proceeds = 60% x $300,000 = $180,000
Partridge's gain or loss = Proceeds - Investment + Gain on sale of inventory - Share of retained earnings = $180,000 - $165,000 - $20,000 - $105,000 = -$39,000
Therefore, the answer is D) $39,000 (loss)

Partridge Purchased a 60% Interest in Sparrow on January 1