Company owner Abel Terrio has reviewed the 2011 financial statements you prepare

Question

Company owner Abel Terrio has reviewed the 2011 financial statements you prepared for Jackson Company as the accountant, and questions the $6,000 loss reported on the sale of its investment in Blackhawk Co. common stock.

Jackson acquired 50,000 shares of Blackhawk's common stock on December 31, 2009, at a cost of $500,000. This stock purchase represented a 40% interest in Blackhawk. The 2010 income statement reported that earnings from all investments were $126,000.

On January 3, 2011, Jackson Company sold the Blackhawk stock for $575,000. Blackhawk did not pay any dividends during 2010 but reported a net income of $202,500 for that year. Terrio believes that because the Blackhawk stock purchase price was $500,000 and was sold for $575,000, the 2011 income statement should report a $75,000 gain on the sale.

Required:

Draft a one-half page memorandum (at least 2 paragraphs) to Terrio explaining why the $6,000 loss on sale of Blackhawk stock is correctly reported.

Explanation / Answer

Memo to Abel Terrio

The 2011 income statement would have reported a $75,000 gain on the sale IF Jackson

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