On January 1, 2016, Halstead, Inc., purchased 78,000 shares of Sedgwick Company

Question

On January 1, 2016, Halstead, Inc., purchased 78,000 shares of Sedgwick Company common stock for $1,430,000, giving Halstead 25 percent ownership and the ability to apply significant influence over Sedgwick. Any excess of cost over book value acquired was attributed solely to goodwill Sedgwick reports net income and dividends as folows. These amounts are assumed to have occurred evenly throughout these years. Dividends are declared and paid in the same period 2016 2017 2018 Net Income $351,000 490,000 605,000 Annual Cash Dividends (paid quarterly) $101,000 144,000 140,000 On July 1, 2018, Halstead sells 13,800 shares of this investment for $22 per share, thus reducing its interest from 25 to 21 percent, but maintaining its significant influence Determine the amounts that would appear on Halstead's 2018 income statement relating to its ownership and partial sale of its investment in Sedgwick's common stock. As total income accrual (no unearned gains) As on sale of shares

Explanation / Answer

Hey,

As ownership is more than 20 % and also Halstead has significant influence over Sedgwick, Investments will be recorded using Equity method.

Investments are initially recorded at cost price

Share of Earnings of Sedgwick will be added to investment account.

Share of Dividends received will be reduced from investment account.

Total Income Accrual on 2018 Income Statement is : 139150

605000*25%*(6/12) = 75625

605000*21%8(6/12) = 63525

Gain/Loss on Sale :

Investment 1430000

Add : 25 % of Income of 2016 & 2017 210250

Less : 25 % of Dividend received of 2016 &2017 (61250)

Balance on January 1,2018 1579000

Add : 25 % of Income (jan 1 to june 30) 75625

Less: 25 % of Dividend (jan 1 to june 30) (17500)

Balance on July 1,2018 1637125

Sold 13800 Shares for $22 so total sale value is $303600

Book value on sale date is (1637125/78000)*13800 = $289645

So Gain on Sale of shares is $13955

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