Question

ABC Company acquired 41% of Davis Company's common stock for $400,000 on January 1, 2022. During...

ABC Company acquired 41% of Davis Company's common stock
for $400,000 on January 1, 2022. During 2022, Davis Company
reported a net income of $59,000 and paid dividends to its
stockholders totaling $20,000. For 2023, Davis Company earned
a net income of $91,000 and paid dividends totaling $38,000.
On December 31, 2023, ABC Company sold 10% of its investment
in Davis Company for $63,000 cash.

Calculate the amount of the gain reported by ABC Company as a
result of its sale of the Davis Company stock. Do not enter
your answer with a minus sign in front of the number.
Business   Accounting   
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Answer #1

Acquiring common stock 41% amounts to significant influence over entity. Equity based method is used for valuing investment

Value of investment at 31st Dec 2022

Investment increased by net income= 59000*41%= 24190

Investment decreased by dividend paid =20000*41%=8200

Value of investment =400000 + 24190 - 8200 = 415990

Value of Investment at 31st dec 2023

= 415990 + 91000*41% - 38000*41% =437720

10 % investment value= 437720 * 10% = 43772

Sale price = 63000

Gain on sale of investment= 63000 - 43772 = $ 19228 Ans

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