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

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