On January 3, 2021, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2021, Thomas reported net income of $300,000 and paid dividends of $100,000. On January 4, 2022, Roberts sold 15,000 shares for $800,000.What is the appropriate journal entry to record the sale of the 15,000 shares?

Question

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When Roberts sells a portion of its investment in Thomas Corporation, it must record the transaction using the cost method. Under the cost method, the investment is recorded at cost, and any gains or losses on the sale of shares are recognized in the income statement.

To record the sale of 15,000 shares of Thomas Corporation common stock, Roberts Company would make the following journal entry:

Cash   $800,000
Investment in Thomas Corporation  $627,000
Gain on sale of investment   $173,000

The cash received from the sale is recorded at its gross amount of $800,000, and the original investment is debited for its carrying amount of $627,000 (30% of Thomas Corporation's net assets of $2,100,000: $630,000). The difference of $173,000 represents a gain on the sale and is recognized in the income statement.

On January 3, 2021, Roberts Company Purchased 30% of the 100,000