Question

On January 1, 2021 M.T. Glass purchased the following
investments:

1.  7,500 shares (representing 15%) of ZZ Company
    stock for $98,000

2.  25,000 shares (representing 40%) of AA Company
    stock for $440,000

M.T. Glass recorded the sale of some of its investments
in 2022 as follows:

1.  September 1 sold 5,000 shares of the ZZ Company
    stock for $76,000

2.  December 31 sold 3,000 shares of the AA Company
    stock for $120,000

AA Company and ZZ Company reported the following
information for the years 2021 and 2022:

                                  AA Company      ZZ Company
Net income in 2021                 $260,000        $200,000
Total dividends paid in 2021       $24,000         $15,000
Market value at Dec 31, 2021       $27/share       $22/share

Net income in 2022                 $160,000        $225,000
Total dividends paid in 2022       $41,000         $5,000
Market value at Dec 31, 2022       $24/share       $29/share

Calculate the amount of the realized gain reported in
M.T. Glass' 2022 income statement resulting from the
sale of the AA Company stock.

Answer 1

Computation of Investment in AA
Investment value at beginning	440,000
Add: Net income at 40% (260,000*40%)	104,000
Less: Dividends	(24,000)
Investment value at beginning of 2022	520,000
Add: Net income at 40% share (160,000*40%)	64,000
Less: Dividends	(41,000)
Investment value at end of 2022	543,000

Number of shares sold = 3000

Percentage of shares sold = 3000/25000 = 12%

Investment value = 543,000 * 12% = 65,160

Selling price = $ 120,000

Realized gain = 120,000 – 65,160 = $ 54,840