On January 4,Year 1,Barber Company purchased 5,000 shares of Convell Company for $60,500.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 2,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 Stock Investment $8,200; credit Equity Method Investments $47,280.
B)Debit Cash $39,000; debit Loss on Sale of Stock Investment $8,880; credit Equity Method Investments $47,880.
C)Debit Cash $39,000; credit Gain on Sale of Stock Investment $2,700; credit Equity Method Investments $36,300.
D)Debit Cash $39,000; credit Gain on Sale of Stock Investment $8,750; credit Equity Method Investments $30,250.
E)Debit Cash $39,000; debit Loss on Sale of Stock Investment $21,500; credit Equity Method Investments $60,500.

Question

Quizplus · Accepted Answer

Barber Company uses the equity method to account for its investment in Convell Company. The initial investment of $60,500 represents 20% of Convell's total shares outstanding, which meets the threshold for significant influence.

To record the sale of 3,000 shares of Convell Company stock, Barber Company will need to make the following entry:

Debit Cash $39,000
Debit Loss on Sale of Stock Investment $8,880
Credit Equity Method Investments $47,880

The loss on sale of stock investment is calculated as follows:

- Cost of shares sold = 3,000/5,000 x $60,500 = $36,300
- Book value of shares sold = 3,000/25,000 x ($72,000 + $67,000) = $8,880 loss

Therefore, the net proceeds from the sale of shares received by Barber Company are ($39,000 - $8,880) = $30,120.

The other answer choices either have incorrect amounts or incorrectly classify the transaction as a gain or loss.

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