On January 1, 2017, Wayne Co. purchased 80,000 shares (40%) of the common stock

Question

On January 1, 2017, Wayne Co. purchased 80,000 shares (40%) of the common stock of Grayson Corp., paying $1,000,000. At that time Grayson Corp. book value was $2,250,000. Grayson had a equipment undervalued by $100,000 and a useful life of 5 years. Any other excess fair value from this transaction was attributable to good will. During 2015, Grayson reported income of $400,000 and paid dividends of $160,000. At the close of business on 12/31/2017, Wayne Co. sold 10,000 shares (or 12 ½%) of Grayson Corp. for $150,000. What is the balance in Wayne Co's. Investment in Grayson Corp account after Wayne Co. had sold the 10,000 shares of Grayson Corp on 12/31/2017. Prepare an analysis of the investment account from 1/1/2017 up to and including the sale of 10,000 shares of Grayson Corp on 12/31/2017 to prove your answer. BE SURE TO SHOW ALL WORK IN SUPPORT OF YOUR INVESTMENT IN GRAYSON CORP. INVESTMENT ANALYSIS. Prepare the Journal Entry Wayne Co. would make to record the sale of 10,000 shares of Grayson Corp at 12/31/2017.

Explanation / Answer

Particulars Amount $ Book value of Grayson on the date of investment    22,50,000.00 Net book value    22,50,000.00 Share acquired 40% Proportinate share       9,00,000.00 Less: Investment made -10,00,000.00 Undervalued equipment     -1,00,000.00 Investment value as on 01.01.2017       9,40,000.00 Add: Earnings of current year 400000*40%       1,60,000.00 Less: Dividend paid 160000*40%         -64,000.00 Less: Equipment depreciation (100000/5)         -20,000.00 Investment value as on 31.12.2017    10,16,000.00 Proportinate 12.5% investment value       1,27,000.00 Less: Sale value     -1,50,000.00 Gain on sale of shares         -23,000.00 Entry as on 12/31/2017 Bank a/c       1,50,000.00 Investment in shares of Grayson 1,27,000.00 Gain on sales of shares      23,000.00 (Being sale of 12.5% stake in Grayson company for 150,000 and thus making gain) Note: Above investment account is prepared by using equity method Under equity method net income from investee account increase investment account and dividend received decreases investment account And any excess balace paid at the time of investment shall be amortised over the life of the asset

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