On January 4,Year 1,Barber Company purchased 5,000 shares of Convell Company for $59,500 plus a broker's fee of $1,000.Convell Company has a total of 25,000 shares of common stock outstanding and it is presumed the Barber Company will have a significant influence over Convell.During each of the next two years,Convell declared and paid cash dividends of $0.85 per share,and its net income was $72,000 and $67,000 for Year 1 and Year 2,respectively.The January 12,Year 3,entry to record Barber's sale of 3,000 shares of Convell Company stock,which represents 60% of Barber's total investment,for $39,000 cash should be:
A)Debit Cash $39,000; debit Loss on Sale of Investment $8,200; credit Equity Method Investments $47,280.
B)Debit Cash $39,000; debit Loss on Sale of Investment $8,880; credit Equity Method Investments $47,880.
C)Debit Cash $39,000; credit Gain on Sale of Investment $2,700; credit Equity Method Investments $36,300.
D)Debit Cash $39,000; credit Gain on Sale of Investment $8,750; credit Equity Method Investments $30,250.
E)Debit Cash $39,000; debit Loss on Sale of Investment $21,500; credit Equity Method Investments $60,500.

Question

Quizplus · Accepted Answer

Under the equity method, the investor records its share of the investee's net income as an increase to the investment account and dividends received as a reduction of the investment account. The investment account is adjusted for the investor's share of any changes in the investee's equity, including gains and losses on the investee's assets or liabilities.

In Year 1, Barber's share of Convell's net income is $18,000 ($72,000 x 20%), which increases Barber's investment account to $78,500 ($59,500 + $18,000 + $1,000). In Year 2, Barber's share of Convell's net income is $13,400 ($67,000 x 20%), which further increases Barber's investment account to $91,900 ($78,500 + $13,400 + $1,000).

When Barber sells 3,000 shares of Convell on January 12, Year 3, it will recognize a loss on sale of investment equal to the difference between the sale price of $39,000 and the carrying amount of the sold shares of $47,880 ($91,900 x 60% = $55,140 - $1,000 broker's fee = $54,140 - 3,000 shares x $18.96 carrying amount per share = $5,760). The loss on sale of investment is $8,880 ($5,760 - $39,000).

The entry to record the sale of 3,000 shares of Convell Company stock is:
Debit Cash $39,000
Debit Loss on Sale of Investment $8,880
Credit Equity Method Investments $47,880

On January 4,Year 1,Barber Company Purchased 5,000 Shares of Convell