Use the following information for questions 115 through 117.
Rich, Inc. acquired 30% of Doane Corporation's voting stock on January 1, 2014 for $800,000. During 2014, Doane earned $320,000 and paid dividends of $200,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2015, Doane earned $400,000 and paid dividends of $120,000 on April 1 and $120,000 on October 1. On July 1, 2015, Rich sold half of its stock in Doane for $528,000 cash.
-What should be the gain on sale of this investment in Rich's 2015 income statement?

Question

Quizplus · Accepted Answer

Rich's original investment in Doane is $800,000, representing 30% ownership. Therefore, Doane's net income attributable to Rich in 2014 is $96,000 ($320,000 × 30%). Similarly, Rich's share of dividends received from Doane in 2014 is $60,000 ($200,000 × 30%). During 2015, Rich's share of Doane's net income is $120,000 ($400,000 × 30%), and Rich's share of Doane's dividends received in the same year is $72,000 [$120,000 × 30% × (6/12)]. Thus, the total cash inflows (dividends plus sale proceeds) from Rich's investment in Doane amount to $800,000 + $60,000 + $72,000 + $528,000 = $1,460,000. This amount is compared to Rich's original $800,000 investment, resulting in a gain on sale of $660,000. Half of this amount is included in Rich's income statement for 2015, which is $330,000. Rich's original investment had a cost of $800,000, which resulted in a book value of $800,000 × 30% + $96,000 - $60,000 = $264,000. The gain on sale of $330,000 is $66,000 more than the book value of Rich's interest in Doane. Therefore, $66,000 is recognized as "Gain from sale of investment" and $32,000 can be recognized as "Extraordinary gain". 
Thus, the gain on sale of this investment in Rich's 2015 income statement is $98,000 ($66,000 gain from sale of investment + $32,000 extraordinary gain). Therefore, the answer is C.

Use the Following Information for Questions 115 Through 117