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	=60200025%(1/2)
Equity method income to be reported on income statement for the period July 1 to December 31	=60200021%(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	=60200025%(1/2)
Less: Dividends received in 2018 till June 30	=-14300025%(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 ago

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