Question

Wildhorse, Inc. acquired 30% of Ayayai Corporation's voting stock on January 1, 2021 for $990000. During 2021, Ayayai earned $364000 and paid dividends of $232000. Wildhorse's 30% interest in Ayayai gives Wildhorse the ability to exercise significant influence over Ayayai's operating and financial policies. During 2022, Ayayai earned $479000 and paid cash dividends of $166000 on April 1 and $166000 on October 1. On July 1, 2022, Wildhorse sold half of its stock in Ayayai for $663000 cash. What should the gain be on sale of this investment in Wildhorse's 2022 income statement?

A. $137175.

B.$108300.

C.$168000.

D.$148200.

Answer 1

Solution

Wildhorse Inc

Determination of gain on sale of investment in Ayayai Corporation:

The correct option is A. $137,175

Computations:

Investment in Ayayai (30%)               $990,000

Add: 30% of net income in 2021       $109,200

Less: dividends 30% x232,000           ($69,600)

Investment at Dec 31, 2021                $1,029,600

Add: Half of net income in 2022       $71,850

Less: dividends on April 1, 2022        ($49,800)

Investment in Ayayai on July 1, 2022            $1,051,650

Value of 50% investment in Ayayai on July 1 $525,825

Sale value of 50% investment in Ayayai $663,000

Gain on sale = 663,000 – 525,825 = $137,175

Notes:

1. 30% of net income in 2021 = 364,000 x 0.3 = 109,200

2. 30% of dividends paid 2021 = 232,000 x 0.3 = 69,600

Dividends are return on investment, hence deducted from cost price.

3. Since, sale of 50% of investment effected on July1, 2022, the share in net income on that date is added to the investment in Ayayai.

50% x 479,000 x 30% = 71,850

4. 30% of Dividends paid on April 1, 2022 = 30% x 166,000 = 49,800

5. Dividends paid on Oct 1 are considered for determination of gain or loss on sale of 50% investment as the dividends are paid after the date of sale, July 1, 2022.