Hi all, this question has been confusing me:
“Lee, Inc. acquired 30% of Polk Corp's voting stock on January 1, Year 1, for $100,000. During Year 1, Polk earned $40,000 and paid dividends of $25,000. Lee's 30% interest in Polk gives Lee the ability to exercise significant influence over Polk's operating and financial policies. During Year 2, Polk earned $50,000 and paid dividends of 415,000 on April 1, and $150,000 on October 1. Only July 1, Year 2, Lee sold half its stock on Polk for $66,000 cash.
What should be the gain on sale of this investment in Lee's Year 2 income statement?”
I'm stuck on how the carrying value is calculated. Becker's solution states that you would add year 1 income and dividends (based on 30% ownership) to the purchase price. You would also add HALF of year 2 income (or 1/2 x 50,000 x 30%) and the full year 2 dividend paid out (15,000 x 30%). I'm confused. Why aren't we adding half of the dividend paid out, or 1/2 x 15,000 x 30%?
CPA license in progress....
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