On January 1, 2019, TXU Europe Corporation purchased 40% of the outstanding stock of Alberta Power Pool Corporation for $800,000. Net income reported by Alberta Power Pool Corporation for
2019 and 2020 was, respectively, $100,000 and $125,000. Dividends paid by Alberta Power Pool
Corporation during 2019 and 2020 were, respectively, $60,000 and $75,000. Assume on December
31, 2020, TXU Europe Corporation sells 50% of its investment in Alberta Power Pool Corporation
For $525,000. TXU Europe Corporation will report a:

Question

Quizplus · Accepted Answer

TXU Europe Corporation's investment in Alberta Power Pool Corporation would have been accounted for using the equity method given they purchased a significant but not controlling interest (40%). Under the equity method, the investment is initially recorded at cost and subsequently adjusted for the investor's share of the investee's net income or loss and dividends received.1. Initial investment: $800,0002. Share of net income in 2019: 40% of $100,000 = $40,0003. Less dividends received in 2019: 40% of $60,000 = ($24,000)4. Share of net income in 2020: 40% of $125,000 = $50,0005. Less dividends received in 2020: 40% of $75,000 = ($30,000)The carrying amount of the investment at the end of 2020 before the sale:$800,000 + $40,000 - $24,000 + $50,000 - $30,000 = $836,000TXU Europe Corporation sells 50% of its investment, so the carrying amount attributable to the portion sold is 50% of $836,000 = $418,000.The sale proceeds are $525,000, so the gain on sale is $525,000 - $418,000 = $107,000.

On January 1, 2019, TXU Europe Corporation Purchased 40% of the Outstanding