On January 4, Year 1, Larsen Company purchased 11,000 shares of Warner Company f
ID: 2599567 • Letter: O
Question
On January 4, Year 1, Larsen Company purchased 11,000 shares of Warner Company for $132,000 plus a broker's fee of $3,400. Warner Company has a total of 55,000 shares of common stock outstanding and it is presumed the Larsen Company will have a significant influence over Warner. During each of the next two years, Warner declared and paid cash dividends of $0.85 per share, and its net income was $108,000 and $103,000 for Year 1 and Year 2, respectively. The January 12, Year 3, entry to record the sale of 6,600 shares of Warner Company stock for $89,100 cash should be:
Debit Cash $89,100; debit Loss on Sale of Investment $46,300; credit Long-Term Investments $135,400.
Debit Cash $89,100; debit Loss on Sale of Investment $6,240; credit Long-Term Investments $95,340.
Debit Cash $89,100; debit Loss on Sale of Investment $18,700; credit Long-Term Investments $70,400.
Debit Cash $89,100; debit Loss on Sale of Investment $18,700; credit Long-Term Investments $107,800.
Debit Cash $89,100; debit Loss on Sale of Investment $7,860; credit Long-Term Investments $81,240.
Explanation / Answer
Solution: Debit Cash $89,100; debit Loss on Sale of Investment $6,240; credit Long-Term Investments $95,340
Working:
Working
Purchase price of investment
135400
Dividends received
Year 1 (0.85*11,000)
-9350
Year 2 (0.85*11,000)
-9350
Year 1 income (20%*108,000)
21600
11000/55000*100=20%
Year 2 income (20%*103,000)
20600
11000/55000*100=20%
Book value of investment at
158900
Book value of 60% investment
95340
Cash received
89100
Loss on sale
6240
Working
Purchase price of investment
135400
Dividends received
Year 1 (0.85*11,000)
-9350
Year 2 (0.85*11,000)
-9350
Year 1 income (20%*108,000)
21600
11000/55000*100=20%
Year 2 income (20%*103,000)
20600
11000/55000*100=20%
Book value of investment at
158900
Book value of 60% investment
95340
Cash received
89100
Loss on sale
6240
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