Tansent Finance Ltd. acquired 30% of Morton Corp.'s common shares on January 1, 20X1 for $240,000. During 20X1, Morton earned $100,000 and paid dividends of $60,000. Tansent's 30% interest in Morton gives Tansent the ability to exercise significant influence over Morton 's operating and financial policies. During 20X2, Morton earned $120,000 and declared dividends of $40,000 on April 1 and $40,000 on October 1. On July 1, 20X2, Tansent sold half of its shares in Morton for $158,000 cash.

-What should be the gain on sale of this investment in Tansent's 20X2 statement of earnings?
A) $38,000
B) $29,000
C) $23,000
D) $35,000

Question

Tansent Finance Ltd. acquired 30% of Morton Corp.'s common shares on January 1, 20X1 for $240,000. During 20X1, Morton earned $100,000 and paid dividends of $60,000. Tansent's 30% interest in Morton gives Tansent the ability to exercise significant influence over Morton 's operating and financial policies. During 20X2, Morton earned $120,000 and declared dividends of $40,000 on April 1 and $40,000 on October 1. On July 1, 20X2, Tansent sold half of its shares in Morton for $158,000 cash.

-What should be the gain on sale of this investment in Tansent's 20X2 statement of earnings?

-What should be the gain on sale of this investment in Tansent's 20X2 statement of earnings?
A) $38,000
B) $29,000
C) $23,000
D) $35,000

Quizplus · Accepted Answer

The gain on sale is calculated by determining the carrying amount of the investment at the time of sale and subtracting it from the sale proceeds. Initially, Tansent acquired 30% of Morton for $240,000. By the end of 20X1, Tansent would have recognized its share of Morton's earnings ($100,000 * 30% = $30,000) and dividends received ($60,000 * 30% = $18,000) as increases and decreases in the investment's carrying amount, respectively. Thus, the carrying amount at the beginning of 20X2 would be $240,000 + $30,000 - $18,000 = $252,000. For the first half of 20X2, Tansent would recognize additional earnings ($120,000 * 30% * 1/2 = $18,000) and dividends received before the sale ($40,000 * 30% = $12,000) with the same adjustments. The carrying amount just before the sale would be $252,000 + $18,000 - $12,000 = $258,000. Since Tansent sold half of its shares, the carrying amount attributable to the sale is half of $258,000, which is $129,000. The sale proceeds were $158,000, so the gain is $158,000 - $129,000 = $29,000.