Question
In: Accounting
On January 1, 2016, Halstead, Inc., purchased 81,000 shares of Sedgwick Company common stock for $1,533,000,...
On January 1, 2016, Halstead, Inc., purchased 81,000 shares of Sedgwick Company common stock for $1,533,000, giving Halstead 25 percent ownership and the ability to apply significant influence over Sedgwick. Any excess of cost over book value acquired was attributed solely to goodwill.
Sedgwick reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout these years. Dividends are declared and paid in the same period.
| Net Income | Annual Cash Dividends (paid quarterly) | |
| 2016 | $378,000 | $108,000 |
| 2017 | 573,000 | 129,000 |
| 2018 | 602,000 | 143,000 |
On July 1, 2018, Halstead sells 10,000 shares of this investment for $24 per share, thus reducing its interest from 25 to 21 percent, but maintaining its significant influence.
Determine the amounts that would appear on Halstead's 2018 income statement relating to its ownership and partial sale of its investment in Sedgwick's common stock.
Solutions
Expert Solution
| Equity method income to be reported on income statement for the period January 1 to June 30 | 75250 |
| Equity method income to be reported on income statement for the period July 1 to December 31 | 63210 |
| Amount that would appear on the income statement relating to ownership | 138460 |
| Amount that would appear on the income statement relating to partial sale of investment | 21620 |
| Total | 160080 |
| Gain on sale of 10,000 shares has been calculated as follows: | |
| Cost of 81,000 shares | 1533000 |
| Add: Share in Sedgwick Company's 2016 net income | 94500 |
| Less: Dividends received in 2016 | -27000 |
| Add: Share in Sedgwick Company's 2017 net income | 143250 |
| Less: Dividends received in 2017 | -32250 |
| Add: Share in Sedgwick Company's 2018 net income till June 30 | 75250 |
| Less: Dividends received in 2018 till June 30 | -17875 |
| Book value of 81,000 shares on July 1, 2018 | 1768875 |
| Selling price of 10,000 shares | 240000 |
| Book value of 81,000 shares | 218380 |
| Gain on sale of 10,000 shares | 21620 |
Above figures have been calculated in the following manner:
| Equity method income to be reported on income statement for the period January 1 to June 30 | =602000*25%*(1/2) |
| Equity method income to be reported on income statement for the period July 1 to December 31 | =602000*21%*(1/2) |
| Amount that would appear on the income statement relating to ownership | =75250+63210 |
| Amount that would appear on the income statement relating to partial sale of investment | 21620 |
| Total | =138460+21620 |
| Gain on sale of 10,000 shares has been calculated as follows: | |
| Cost of 81,000 shares | 1533000 |
| Add: Share in Sedgwick Company's 2016 net income | =378000*25% |
| Less: Dividends received in 2016 | =-108000*25% |
| Add: Share in Sedgwick Company's 2017 net income | =573000*25% |
| Less: Dividends received in 2017 | =-129000*25% |
| Add: Share in Sedgwick Company's 2018 net income till June 30 | =602000*25%*(1/2) |
| Less: Dividends received in 2018 till June 30 | =-143000*25%*(1/2) |
| Total: Book value of 81,000 shares on July 1, 2018 | 1768875 |
| Selling price of 10,000 shares | =10000*24 |
| Book value of 81,000 shares | =(1768875/81000)*10000 |
| Gain on sale of 10,000 shares | =240000-218380 |
ekkarill92 answered 1 year agoRelated Solutions
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