Rich, Inc. acquired 30% of Doane Corp.\'s voting stock on January 1, 2010 for $4

Question

Rich, Inc. acquired 30% of Doane Corp.'s voting stock on January 1, 2010 for $400,000. During 2010, Doane earned $160,000 and paid dividends of $100,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2011, Doane earned $200,000 and paid dividends of $60,000 on April 1 and $60,000 on October 1. On July 1, 2011, Rich sold half of its stock in Doane for $264,000 cash.

What should be the gain on sale of this investment in Rich's 2011 income statement?
$64,000.

$55,000.

$49,000.

$40,000.

Explanation / Answer

Before income taxes, amount Rich include in its 2010 income statement as
a result of the investment = $160,000 × 30% = $48,000

The carrying amount of this investment in Rich's December 31, 2010 balance sheet

= $400,000 + $48,000 – ($100,000 × 30%) = $418,000

gain on sale of this investment in Rich's 2011 income statement

$418,000 – ($60,000 × 30%) + ($200,000 × 50% × 30%) = $430,000.
$264,000 – ($430,000 ÷ 2) = $49,000

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