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On January 1, 2014, JVE Corp. paid $1,000,000 cash to acquire 35% of the common shares...

On January 1, 2014, JVE Corp. paid $1,000,000 cash to acquire 35% of the common shares of PG Corp. At the time of acquisition, the carrying amount of PG’s common shares was $900,000, and its retained earnings were $1,500,000. The fair values of the identifiable net assets (INA) approximated their carrying values except for the following: • The fair value of machinery was estimated to be $400,000; the net book value was $450,000. Other information follows: • The remaining useful life of machinery at the date of acquisition was five years, and the estimated residual value was $0. Both companies depreciate their equipment on a straight-line basis. • PG’s net income for the years ended December 31, 2014, and December 31, 2015, was $125,000 and $135,000, respectively. • On September 1, 2014, PG declared and paid $75,000 of dividends on its common shares; no other dividends have been declared since. • The investment in the associate was not impaired. • On January 1, 2016, JVE reduced its ownership stake in PG to 25%. Cash proceeds realized from the sale of the shares was $330,000. What is the amount of gain to be reported on the partial disposal of PG’s common shares on January 1, 20X6? a) $16,286 b) $23,786 c) $24,786 d) $37,714

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Expert Solution

Amount in $
Investment on January 1,2014        1,000,000
Less: Dividend 2014              26,250 (75,000*0.35)
Add: Investment revenue 2014              43,750 (125,000*0.35)
Add: Machinery amortization of less fair value-2014                3,500 ((50,000/5)*0.35)
Add: Investment revenue 2015              47,250 (135,000*0.35)
Add: Machinery amortization of less fair value -2015                3,500 ((50,000/5)*0.35)
Investment on January 1,2016        1,071,750
Amount in $
Sales Proceeds of 10% stake           330,000
Less: Proportionate Cost of 10%           306,214 ( 1,071,750 x 10/25)
Gain on disposal              23,786
Correct answer is option b ( i.e. $ 23,786 ).

ekkarill92 answered 2 years ago
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